Guaranteed Basic Income Would Reduce Poverty, but Lower Incentive to Work: PBO Analysis

Upcoming Liberal convention to include debate of resolution calling for universal basic income
April 8, 2021 Updated: April 10, 2021

A nationwide guaranteed basic income would cut poverty rates in Canada by half, but would come at the expense of working individuals, according to an analysis by the parliamentary budget officer (PBO).

The PBO said several parliamentarians requested an analysis of the impacts of launching a national guaranteed basic income (GBI), which would provide each Canadian with a minimum income with no strings attached.

According to the analysis, a GBI would reduce the poverty rate by 49 percent in 2022 on a national level. It would would vary across provinces, with poverty reduction most notable in Manitoba and Quebec.

Budget officer Yves Giroux said the impact of GBI on disposable household income is progressive, with those in the lowest income quintile benefiting the most, seeing an average amount of $4,535 (a 17.5 percent increase).

Households in the third, fourth, and fifth quintiles would see a decrease in their average disposable income, which is incurred when active working individuals face an increase in taxes due to the elimination of many refundable and non-refundable tax credits.

This means that over 6.4 million people (16.4 percent of the population) would see a rise in disposable income, with a net positive impact of $8,227 (49.6 percent increase). However, 16.8 million Canadians would suffer net income loss of $3,114, (5.4 percent decrease).

“More than two and a half individuals are losing from this measure for every person benefitting,” the analysis stated.

Overall, a GBI would cost Canada an estimated $85 billion if implemented this fiscal year, and the cost would continue to rise over the years, reaching to over $93 billion by 2026.

The PBO also calculated the costs of the “behavioural impact” of a guaranteed basic income.

“The introduction of a GBI will provide a disincentive to work,” the analysis stated.

This disincentive to work manifests in two ways. First, individuals are incentivized to cut back work hours, as the profit from each additional hour of work is lowered. Employed workers can increase the size of their GBI by working fewer hours, rather than seeing their hard-earned income lost to higher taxes.

Lower-wage workers may opt out of the labour force entirely, taking full advantage of the guaranteed income.

“These two facets combined represent a disincentive for the individual to work, giving rise to the term ‘welfare wall,’ a situation in which there is a high effective tax rate that strongly discourages entering the paid workforce,” the report said.

The PBO estimates that employees would reduce their working hours by 1.3 percent nationally, which would cost federal tax revenues between $3 billion and $3.3 billion annually over the next five years.

This fiscal analysis comes just ahead of both the Liberals’ and NDP’s national conventions, which are set to take place over the weekend. MPs have put forth resolutions in their respective conventions to make the guaranteed basic income a main party policy.

The Liberal caucus is sponsoring a resolution calling for a basic income, claiming it would “simplify benefit applications for Canadians in need, allow for merging of government programs and reduce administrative costs for government.”