All of a sudden, Asia is talking about welfare. For years the region’s policymakers dismissed the idea of state welfare as somehow un-Asian. Public schemes to dole out benefits to the poor were regarded as a flabby Western idea; a corrosive and alien notion in a region renowned for its can-do attitude to work and its strong culture of supportive family ties.
Lately that has begun to change. Worried about persistent poverty and rising inequality, politicians in some Asian countries have concluded a comprehensive safety net is now needed to ensure social stability and future economic development. In other Asian countries, troubled by falling birth rates and increasing life expectancy, policymakers worry that without state help, a diminishing workforce will no longer be able to support a growing army of elderly.
Either way, Asia’s politicians are increasingly proposing innovative schemes to distribute public welfare. Last week, for example, the former Hong Kong financial secretary and would-be government chief executive John Tsang (above) suggested the city should consider introducing a negative income tax. Days earlier, the chief economic adviser to Indian Prime Minister Narendra Modi laid out proposals for a universal basic income. Both ideas merit attention. Each has advantages, each has drawbacks.
In Hong Kong, Tsang provided no details at all about what he had in mind. But in theory, a negative income tax works something like this: the government decides a personal income threshold, say HK$8,000 a month, below which it will apply a negative tax rate of 50 per cent. So, a worker earning HK$6,000 a month who falls HK$2,000 short of the threshold earns a negative tax of 50 per cent on that shortfall. In effect, this means the government tops up his or her earnings by HK$1,000 a month. As a result, the worker actually takes home HK$7,000. Under this scheme, someone who has no earned income at all would be granted a negative tax of 50 per cent on the full HK$8,000 shortfall, which they would get as a HK$4,000 a month dole from the government. And it just so happens that HK$4,000 a month is roughly where the Hong Kong government has determined the city’s poverty line to be. Bingo, poverty eliminated at a stroke.
It’s a nice theory. A negative income tax ensures a minimum basic income for all, and it has the merit of relative simplicity. But unfortunately there a few catches. Critics make the theoretical objection that because the benefit payments fall as earned income rises, so the marginal incentive to work is reduced. But the real problem with a negative income tax, in Hong Kong at any rate, is not so much theoretical as practical.
In most countries, one of the great advantages of a negative income tax would be that it would utilise the existing pay-as-you-go income tax system, and so would require no expensive additional administrative architecture. But Hong Kong does not operate an income tax, only a salaries tax. For a negative income tax to work in Hong Kong, the city would first have to overhaul its entire personal taxation system in order to introduce an income tax. Needless to say, that would be enormously expensive, and would undermine the logic of introducing a negative income tax in the first place.
India’s idea of a universal basic income is more interesting. Under this scheme the government would scrap its 950 welfare programmes and replace them with a single monthly welfare payment that would cover 75 per cent of the population.
One of the great advantages here is simplicity. The current system is riddled with corruption and inefficiency. Under the new system, money intended for poverty alleviation would actually get to the poor, rather than being siphoned off by crooked officials. Moreover, because the benefit is distributed to everyone as a flat payment regardless of existing income, there is no marginal disincentive to additional work.
Critics typically raise two objections. First they argue that because a universal basic income is untargeted, it misallocates benefits to the undeserving rich rather than the needy poor. Second, they contend that such a system would be unsupportably expensive. Neither objection is especially convincing. Traditionally, state benefits like fuel subsidies intended to help the poor have in practice gone disproportionately to the rich. That’s because the wealthy naturally use more fuel, and so benefit more from the subsidy. In that sense, a universal basic income would actually help the poor more than supposedly targeted subsidies.
And in terms of cost, a universal basic income would be surprisingly affordable. According to the Indian government, its current poverty alleviation schemes cost 3.7 per cent of gross domestic product. Scrapping them and reallocating the money to a single scheme would enable the government to pay a universal basic income of 5,866 rupees (HK$676) a month to 75 per cent of the population. That would cut the absolute poverty rate from 22 per cent of the population today to 2.5 per cent.
In India, it might just be worth a try. But such a universal scheme would face enormous institutional resistance. And in Hong Kong the opposition would surely prove insurmountable. That’s because a universal basic income – and indeed a negative income tax – is designed to replace all existing welfare payments. And, in Hong Kong, by far the largest state benefit disbursed is public housing. In other words, for any such scheme to work as intended, the government would have to privatise the public housing stock and allow a free market to operate. Any such move would run into ferocious resistance both from the government-developer complex that benefits under the existing system, and from wealthy public housing tenants who would be disadvantaged by a shift to a market system.
In short, despite the talk, none of these innovative welfare schemes are likely to be implemented any time in the forseeable future, or at least not in anything but a highly complex and hybridised ineffectual form intended more as a political gimmick than a genuine attempt to create a progressive public welfare system. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years