Assets for the people
The government is pressing ahead with a plan for a trust fund for every baby. The state already subsidises the asset accumulation of the better off, so why not extend asset ownership to all? Income feeds stomachs?assets feed minds
It is said that the first Blair government did not find the big policy idea: the emblematic proposal that would combine progressive philosophy and practical politics. But perhaps it did. Just before the election, Tony Blair, Gordon Brown, David Blunkett and Alistair Darling launched the ?child trust fund? (or ?baby bond?). The idea is that every child will receive a trust fund at birth that they can access on reaching the age of majority. A separate but linked idea is the savings gateway, in which low-income adults will get government help in building up their savings. Any policy launched in the shadow of an election is, of course, likely to be accused of gimmickry. The baby bond was no exception. But the novelty of the idea at least produced some interesting alliances. The Guardian and the Sun championed the proposals, whilst the Independent and the Telegraph savaged them.
Reviving an old tradition
The trust fund idea attracted attention to the growing levels of asset inequality in Britain and to the fact that the state subsidises asset accumulation by the better off (in the form of tax breaks for pension funds and so on). It also embodied the idea of ?opportunity for all? by spreading the freedom and choice that assets provide to the less well off. But it did so by cutting with the grain of modern life?the proposed funds are individual not collective assets.
In fact, the thinking behind the bond is not that novel. It builds on a strand of progressive thought that has explored the link between property ownership, personal autonomy and the diffusion of political and economic power.
In the British context, the popularisation and celebration of the yeoman property-owner was an enduring theme of political and economic discourse from early Tudor times until the industrial revolution. During the revolutionary period in late 18th-century Europe and America, the role of democratic governments in widening property rights was stressed by egalitarian republicans such as Tom Paine. He proposed that all citizens should be guaranteed a minimum level of property entitlement, while strict limits would be placed on the transfer of capital across generations. Paine wanted every 21- year-old man and woman to receive an endowment of ?15, financed from an inheritance tax. His friend and contemporary, Thomas Jefferson, called for a ?yeoman democracy? in which ?every person of full age? shall be entitled to an appropriation of 50 acres.? Paine argued that big inequalities in wealth generate inequalities in liberty. But he was hostile to the idea of public ownership as a proxy for universalising private property. Collectivism of this type would not help produce the type of rugged citizens capable of holding to account those who wield power. Rather than nationalisation of the emerging industrial economy, Paine would have advocated universal property stakes, stringent taxes on inherited wealth and progressive income tax. This was the route through which economic egalitarianism could be married with individual rights.
For nearly two centuries after Jefferson and Paine, this tradition was smothered by a combination of the collectivist/statist aspirations of socialism and the hostility of the property-owning classes who defended existing patterns of inheritance as inviolable. A few individual thinkers like the British Nobel prize winning economist James Meade kept the tradition alive. But non-statist egalitarianism was also a victim of the strong connection in 20th-century British politics between property ownership, political representation and class allegiance. Government-sponsored measures to spread private property sounded, to the left, like an ideological betrayal. Even revisionist social democrats, who despaired at the left?s pre-occupation with nationalisation, viewed private property as something to be contained and regulated rather than spread.
As the 20th century wore on, Labour politicians employed a rhetoric about private property that was increasingly at odds with the reality of the consumer economy and the aspirations of an affluent electorate. Those who sought ways of fusing egalitarian instincts with the reality of private ownership did not advance their careers. (In the mid-1980s Bryan Gould proposed radically extending employee share ownership. And Frank Field, as an adviser during the Callaghan government, proposed selling council houses.)
The result of this blind spot of the left was to hand a popular policy idea to the political right and to entrench the inegalitarian, or at least the non-egalitarian, Tory version of the ?property owning democracy.? For all the flaws in the Tory approach to the promotion of home ownership, council house sales, privatisation, private pensions and share ownership, these policies spoke to the hopes and lifestyles of many people and did successfully spread the privileges of asset ownership?albeit mainly to middle and upper earners.
It was the electoral rise of Mrs Thatcher that forced a shift in Labour thinking. After Labour?s 1983 electoral defeat, some of the party?s policy academics began to examine the potential use of market mechanisms and institutions, including private property, in achieving egalitarian ends. More recently, the idea of asset-based welfare has been taken up by two think tanks?the Fabian Society and the Institute for Public Policy Research?and both have in turn drawn on the work of academics in the US. Michael Sherradon of Washington University has proposed individual development accounts: state supported accounts held in the name of individuals used for restricted purposes. More radically, Yale academics Bruce Ackerman and Anne Alstott have recommended a ?stakeholder? grant of $80,000 to everyone at 21 financed by a 2 per cent tax on wealth paid into a ?stakeholder fund.?
Assets and equality: the new agenda
So what exactly is proposed? There are two strands to the government?s thinking, on which an update is expected at the end of November. First, the child trust fund proposal, which involves paying a universal grant of up to ?500 into a savings account for every newborn baby, with subsequent payments of up to ?100 made as the child grows up (say at five, 11, and 16). With very limited extra contributions by parents or grandparents of, say, ?5 a month, this would yield a trust fund of approximately?3,500 at age 18; this would increase to ?5,500 with slightly higher additional contributions. According to the Institute for Fiscal Studies, the total annual cost of the trust fund would be about ?500m. Exactly how the money would be held has yet to be decided. There may also be restrictions on its use: to starting a small business, paying for higher education, putting a down payment on a house or starting a pension fund. But this is not settled, with the libertarians in government?in alliance with the pragmatists?fighting the paternalists. (The minister in charge of this at the Treasury is the former Guardian journalist Ruth Kelly.)
The second, perhaps less eye-catching but still significant proposal, is the ?savings gateway.? This will offer low-income households strong incentives to save: over a period of three to five years, every ?1 of saving by an adult will trigger a matching payment of up to ?1 from government (up to an annual limit). An individual saving ?25 a month of his or her own money in this scheme would accumulate almost ?2,000 after three years.
Whatever the details of the policy there is an equity issue to be addressed. The large number of households with either no or very low levels of financial wealth is a feature of modern Britain. Inequality in wealth far outstrips inequality in income. (Inequality of income attracts most attention but the income spread is surprisingly narrow. The average earner in the top 10 per cent of the income spread is paid only about four times more than the average earner in the bottom 10 per cent. A tiny number of high earners at the very top contribute to the most shocking inequality statistics.)
On asset distribution, the Inland Revenue estimates that the share of marketable wealth of the top 10 per cent rose from 50 per cent to 52 per cent between 1980 and 1994, while the share of the top 50 per cent rose from 91 per cent to 93 per cent. Average savings for the top 10 per cent are ?50,000. At the other end of the scale, the Institute for Fiscal Studies indicates that the proportion of households with no assets at all rose from 5 per cent in 1979 to 10 per cent in 1996 and that the majority of adults have less than ?750 of savings.
Moreover, the trend towards greater asset inequality is set to continue. An increasing proportion of already well-off owner-occupiers are inheriting the houses of their parents. Equity sharing schemes and share options will boost personal wealth further for higher earners. The less well off will miss out on this: not just the low-paid and the unemployed, but also those in the public and voluntary sectors, where there is no equity to hold.
The need to address these trends is reinforced by the fact that government itself is part of the problem of asset inequality. Those with the most have received the most help. Individuals on substantial incomes, who are already in a strong position to accumulate capital, have historically benefited from a range of tax reliefs?what Richard Titmuss referred to as the ?hidden welfare state??in order to encourage private pensions, homeownership, share options, savings and investments. Successive governments, including this one, have reduced some of this middle class welfare: particularly notable has been the phasing out of mortgage interest tax relief and a ?5 billion reduction in pension fund tax breaks. But other elements remain. For example, ?13.7bn was spent on pension tax relief in 2000/2001 and most of this expenditure went to the richest 20 per cent of the population. Worse still, this generosity towards the affluent has run in parallel with a punitive approach towards the level of savings and property that those on low incomes can hold before state benefits are withdrawn. Currently it is as low as ?3,000 for non-pensioner households.
On top of this, governments have traditionally spent large sums of money subsidising another form of asset?human capital?in a way that has greatly benefited the better-off. Despite tuition fees and student loans, enormous subsidies are still going to the beneficiaries of higher education: primarily the sons and daughters of the middle class. The proposed abolition of tuition fees will simply exacerbate the inequality (although that may be countered by some form of graduate tax).
In short, New Labour did not inherit an absence of policies helping people to build up assets. There were plenty of incentives?but they gave help to the wrong people.
Raising the floor
The government?s plans on asset-holding need to dovetail with its commitment to ensure that all children ?start even? or as even as practically possible. This remains a dividing line in contemporary politics. Whereas market liberals shy away from supporting large-scale programmes aimed at compensating disadvantaged children for their starting environments, egalitarians and meritocrats agree that such measures are a central, perhaps the central, social function of the state.
Research has repeatedly shown that the experience of poverty during childhood is itself a very powerful driver of poverty and disadvantage later in life. Labour is pursuing a dual strategy of boosting the incomes of poor families (over ?6 billion extra a year has been spent on benefits for low-income families) and investing in services such as child care, early learning and primary health targeted at disadvantaged localities and individuals.
This is where the baby bond or trust fund idea could be an important additional policy weapon. It is obvious that the offspring of the affluent start with many advantages in life: better schools, safer neighbourhoods, richer social networks. But they also benefit substantially?economically and psychologically?from access to their parents? wealth. It allows down-payments to be made for first homes, training courses to be paid for, and business loans to be secured. Relatively small sums of capital can open the door to other more lucrative forms of investment in financial and human capital. It also provides peace of mind.
These intuitions have now been pinned down in research by John Bynner at the Institute of Education using the National Child Development Study (NCDS). His findings suggest that assets are strongly linked with improvements in health, education and marital stability and increase the chances of employment. Other work suggests that parental saving increases the propensity of children to save when they themselves become adults. All these effects persist, even when the influence of other factors such as social class are taken into account. Assets, it seems, improve people?s behaviour. As Michael Sherraden puts it, ?income may feed stomachs, but assets feed minds.?
Opponents of asset spreading
The baby bond proposal has attracted opposition from across the spectrum. The arguments constitute a case study in what Albert Hirschman has called the ?rhetoric of reaction??the debating devices used by conservatives (on left and right) over the ages to try to block reform. They take the form of ?futility?: that the capital grant will be too small to extend real opportunities to young people; ?perversity?: that rather than extend opportunity a government funded trust fund will foster state-dependency and restrict autonomy amongst beneficiaries; and finally, ?jeopardy?: that the capital endowment will be used as a justification by future governments for cutting back on other forms of social provision.
As is the case with many arguments made against reform, there is a grain of truth in these charges. Take ?futility??as the proposals stand at present the amounts involved are indeed small. However, once the principle is accepted and seen to be popular, they can be increased. Moreover, research suggests that even small amounts can make a significant difference. The Bynner research suggests that savings as low as a few hundred pounds can make a difference to people?s wellbeing whilst other work shows that an inheritance of as low as ?5,000 was sufficient to more than double the chances of self-employment of men and considerably more than that for women. (And for poorer people the knowledge that one is going to come into money at 18 could give a greater sense of a stake in society.) The perversity argument is similarly flawed; given that the amounts are relatively small, it would be difficult to be ?dependent? on them?rather, by giving economic resources to those who previously had none, they are more likely to encourage independence.
The jeopardy argument is the strongest of the three. There is a possibility that this kind of ?one-off? egalitarianism could lead to a harsher welfare system: someone who spent their trust fund on drugs or on trips round the world could be stigmatised as a ?stakeblower? and both they and other claimants could find their entitlements to subsequent welfare payments reduced. But the history of social policy is littered with examples of conservatives claiming that new entitlements would threaten old ones. Moreover, in relation to the baby bond the possibility of ?jeopardy? could be minimised by restricting the uses to which young adults can put their trust funds, (although this does raise administrative problems and might be seen as a crude form of financially-based social engineering.)
Finally, jeopardy may also come in the form of what political philosopher Stuart White labels ?left Thatcherism.? This view maintains that the introduction of large-scale asset-based policies represents a pyrrhic victory for the left: the price for greater asset equality will be the reinforcement of the prevailing right-wing culture of individualism. Conceived of in this way, asset-building is a policy that should be favoured by libertarians and hedonists rather than communitarians and civic-minded social democrats. Those making this point often receive comfortable incomes and own sizeable personal assets that they have built up with help from the state. None the less it is certainly true that more thought needs to be given to the linkages between policy on assets and a concern with democratic renewal.
The politics of asset distribution
Even though the Blair government?s plans for a universal asset policy are more modest than many would like, they will still make Britain a leader in this new field. The scale of the baby bond should be built up over time so that it becomes one of the defining features of the welfare state. By the time Labour leaves office, it should represent one of its lasting legacies: an expression of its commitment to preventing disadvantage, promoting personal autonomy and preserving universalism.
Beyond the baby bond other ways of extending ownership stakes should be considered, too, such as the idea of helping residents in social housing?one of the most asset-poor groups in Britain?to build up equity stakes in their own properties. This idea has been publicly advocated by the transport minister Stephen Byers. Spreading employee ownership beyond the preserve of high earners also remains a good but underdeveloped idea. And as long as economic growth continues to deliver rising incomes, the supporters of the idea of a meaningful citizens? income?an unconditional income that is high enough to live on?will become increasingly vocal.
Critics on the left argue that the baby bond is insufficiently redistributive. It is true that it is envisaged as a universal benefit, going to those who already have money and houses to inherit as well as those who have nothing. However, it should be skewed towards the asset-poor by providing them with the most state support. That support comes from taxation which is broadly progressive, and becoming a little more so with the erosion of part of the middle-class welfare state.
An overhaul of inheritance tax would make taxation still more progressive and could be linked?politically if not fiscally?to the funding of the baby bond. The Inland Revenue estimates that in 1995 total personal wealth stood at ?2,013 billion. In contrast, the yield from inheritance tax in 1997-8 was ?1.7 billion. Wealth passes almost untaxed between generations through lifetime gifts, exempt items such as agricultural land and through devices such as discretionary trusts which can defer tax liabilities for decades. These loopholes need to be eliminated and, as the economist Tony Atkinson and others have advocated, the tax base should be changed from the overall estate to the amount of the inheritance received by each beneficiary.
Finally, the idea of the baby bond could have a broader political impact. To have such an impact the stakes must represent something more than a technocratic tweaking of the tax-benefit system that few will understand or be inspired by. Making the case for universal asset-holding as part of an ambitious account of what citizenship now means could contribute to the creation of a more intellectually self-confident centre left. A centre left that is at ease with the market economy but can competently intervene to alter those aspects of market distribution which conflict with broader social goals.
Gavin Kelly is research director of the IPPR. Julian Le Grand is a professor of social policy at the LSE
