Universal Basic Income deserves another look

Thursday, 16 July 2026

EDITORIAL: In late 1947, a young scholar travelled to a Swiss mountain resort with a group of fellow liberal economists, touting a new way to arrange welfare. The gathering became the founding meeting of the Mont Pelerin Society, a club of free-market thinkers – or neoliberals – that still exists today.

The young academic was a University of Chicago economics professor, Milton Friedman. And among the ideas Professor Friedman advanced was a negative income tax – the inspiration for a Universal Basic Income (UBI). Liberals, he argued, should care deeply about poverty, but should seek ways to alleviate it without creating sprawling bureaucracies or distorting markets.

The negative-income tax proposal was not identical to a UBI, but it shared many of the same ambitions. Over the decades, variations of the idea have attracted supporters from across the political spectrum. Once associated with free-market US conservatives, it is now more commonly championed by figures on the European left. These include the French scholar, Thomas Piketty, and the former Minister of Finance of Greece, Yanis Varoufakis. In New Zealand a version has long been advocated by the Opportunity Party. Our Green Party offers a partial version of it.

The ill-fated guaranteed minimum family income announced on December 17, 1987, by Labour’s then-Minister of Finance, Sir Roger Douglas, had elements that could be seen as drawing on the spirit of UBI. So too did policy work in the 2000s on income tax, benefits and family tax credits by a former National Party deputy minister of finance, Sir Lockwood Smith, that was rejected by his colleagues but which he revealed in his valedictory speech.

Yet today, the Leader of the ACT Party, David Seymour, who leads the party in Parliament most inspired by Friedman, said on Tuesday that it amounts to “everyone on welfare”. That is much too glib.

The problem Professor Friedman was trying to solve remains with us today. As people earn more, government assistance is often withdrawn. The result is a high effective marginal tax rate – the share of every extra dollar earned that disappears through tax and the loss of benefits. For some New Zealanders receiving Working for Families or the Accommodation Supplement, earning extra income can mean losing a substantial share of every additional dollar. The effective marginal tax rate can approach 80%.

That creates an obvious problem. It discourages people from taking on extra hours, overtime or promotions because the financial reward is so much smaller than the headline wage increase suggests. It is one reason New Zealand Superannuation is generally regarded as a well-designed payment. It is universal. Retirees can continue working without having their pension clawed back, avoiding the steep disincentives faced elsewhere in the welfare system.

Professor Friedman saw the negative income tax as a way to shrink government while strengthening incentives to work. Instead of dozens of overlapping welfare programmes, a single payment would provide a guaranteed minimum income while tapering away gradually as earnings increased. In Capitalism and Freedom, published in 1962, he argued the approach could reduce poverty without requiring an elaborate bureaucracy to determine who deserved assistance.

There was also a question of dignity. Welfare systems often require people to justify their circumstances, disclose intimate details of their finances and dependants and navigate a maze of officials and rules. Professor Friedman believed much of that intrusion could be avoided through a simpler system. Supporters of a universal basic income still make many of the same arguments today.

Critics, meanwhile, contend that unconditional payments weaken incentives to work, encourage sloth and would impose enormous fiscal costs and would direct money to millions of people who have no need of government support. A couple of weeks ago, the Prime Minister, Christopher Luxon, said such a policy would “make every New Zealander a beneficiary”. He was not being complimentary.

Both sides have valid points. High effective marginal tax rates remain one of the least attractive features of New Zealand’s tax and transfer system. At the same time, introducing a universal basic income would be extraordinarily expensive. Yet it could also allow governments to simplify much of today’s complicated web of income support, leaving more targeted assistance for people with disabilities or those facing exceptional hardship.

The welfare state itself has changed dramatically since the Social Security Act 1938. Income support is no longer simply a last resort for the destitute. Millions of dollars now flow each year to working households through tax credits and supplements. Receiving government support has become a routine feature of middle New Zealand to be claimed, not a stigmatised activity to be avoided.

That reflects democratic choice. Voters have repeatedly endorsed governments that provide extensive assistance to working families. But accepting that principle does not mean accepting the current machinery as the best possible way of delivering it.

With artificial intelligence poised to reshape labour markets and technology making it easier than ever to connect capital with labour across borders, the debate Professor Friedman began nearly 80 years ago, and continued by Professor Piketty and others today, deserves another hearing.