Baby bonds – can asset-based welfare tackle inequality?

After a long gestation period, the Chancellor finally announced in this year's Budget that baby bonds (the Child Trust Fund) will be introduced in 2005. Claire Kober asks how effective this asset-based approach will be in tackling child poverty.

Chancellors like to pull a few rabbits out of the hat on their biggest day of the year – Budget day. The speculation this year, however, was that we would not have any big surprises. The basic architecture and direction in many policy areas is in place; year-on-year additional funding for public services and reform of tax credits. The Budget, we were told, was to be all about how, despite difficult times ahead, Britain is better placed than many of our European partners. Well, it was not quite as bland as some had feared; one substantive announcement was the implementation of the Child Trust Fund or 'baby bond'.

The policy has had a particularly long gestation period; it was first announced as long ago as April 2001. But then things went quiet. Rumours abounded that it had been shelved or kicked into the long grass and that the idea had received a less than enthusiastic response from some parts of government. Wind the clock back six months and people were talking of the demise of the baby bond. Now though, the 'will they won't they' questions have been answered and we know that there are children alive today who will benefit from the Chancellor's Child Trust Fund.

All children born after September 2002 will be eligible to open an account when they become available in 2005. If they are from a family who is in receipt of unemployment benefits or eligible for the full child tax credit, they will have £500 placed into their own account. Those from better-off backgrounds will get £250. This money can then be added to by family, friends and later the child her/himself. Together with top-ups made by the Government (at levels yet to be decided) each child's nest egg will grow to an average of £3,000 to £4,000.

This is not just a gimmick and needs to be taken seriously. Underpinning the baby bond are ideas that some think have the power to reshape the way we think about welfare policy. The policy is indicative of a new debate; one about asset-based welfare and the role that assets (in this case financial ones) can play in improving individual and collective wellbeing. A metaphor explains the case well: When an accountant examines the health of a firm s/he takes note of the revenue flows but also looks in the accounts for the company's capital or stocks. Welfare theory, it is contended, has traditionally only thought about human welfare in terms of flows or income. For a fuller comprehension of wellbeing people's stocks or resources need also to be attended to.

The Child Trust Fund is not only grounded in theory; it has also been implemented only after extensive debate, with proponents and opponents trading views in the seminar rooms and publications of the policy world. This does not mean that there are not questions that need to be asked about the policy. Is the Child Trust Fund (and asset-based welfare of which it is part) the best way to reduce inequality? Will it help reduce child poverty or is it just a distraction from more tried and tested policy approaches? Will it help open up opportunity for all young people in Britain?

Firstly; the impact on inequality. We know a lot about income inequality. The Treasury's policies have a redistributive impact in themselves but they have to be seen in the context of increased income inequality in the labour market. Increasing income inequality has been slowed down, but not stopped. So what does the Child Trust Fund add? Directly it appears to do little for income inequality, but it could have a redistributive affect on wealth or assets.

Assets are currently the preserve of the few. The distribution of wealth is far more unequal than that of income and there are increasing numbers of people who are totally 'asset-excluded'. In 1998 the top 1 per cent of the population held 17 per cent of all personal wealth. By 1999 this figure had increased to 23 per cent.[Footnote 1] Between 1978 and 1996 the number of people who were asset-excluded doubled from 5 to 10 per cent of the population. Today, nearly half the households in Britain earning less than £200 a week have no savings; and 72 per cent of lone parents have no savings at all.[Footnote 2]

Most would agree that in an ideal world such inequalities would be reduced, but whether it should be a priority for the Government over income inequality is a different matter. It might be contended that we should concentrate on increasing incomes and that this is the best long-term way of ensuring that people go on to build up assets and wealth as well. Indeed the Child Trust Fund in itself will do little to affect overall wealth distribution; with the levels of government contributions only just scratching the surface of current inequalities. Perhaps, critics argue, there are better ways of the Government creating a more equal wealth distribution; what about long overdue reform of inheritance tax?

And what about the big question: what does the Child Trust Fund mean given the Government's historic pledge to abolish child poverty in a generation? Though there is currently a consultation process on how the Government should define child poverty, it is almost certain that some measure of income (probably 60 per cent of median income) will be at the centre of the measure. The Child Trust Fund will not reduce poverty measured purely against any income threshold.

The Child Trust Fund will not reduce poverty measured purely against any income threshold

If we understand poverty more broadly though, it could be important. We need to ask ourselves: Why are we interested in child poverty? Partly, at least, it is because childhood deprivation leads to poor life outcomes. So what impacts on these outcomes? Government is beginning to realise this question is complex to answer. Yes – family income is important but so too is access to public services, early-years interventions like Sure Start and the parent-child relationship. The Child Trust Fund is based on the view that assets should be added to this list. Proponents therefore believe that it should be seen as at least being related to debates about child poverty.

Holding an asset in early adulthood does, on average, lead to improved life chances – better health, less time unemployed and higher incomes. Intuitively this is understandable. Imagine starting adulthood with no financial buffer. This currently limits young people's aspirations and confines many to day-to-day thinking. By contrast having a nest-egg to draw on will better allow people to expand their horizons and opportunities. There is also growing evidence that possessing wealth in your early adulthood improves life outcomes, even after controlling for factors such as income and social class. Michael Sherraden, Director of the Center for Social Development at Washington University has argued:

'Income only maintains consumption, but assets change the way people interact with the world. With assets, people begin to think for the long term and pursue long-term goals. In other words, while income feeds peoples' stomachs, assets change their minds.' [Footnote 3]

Supporters of an asset-based approach argue that modern welfare policy should thus focus on both building assets and boosting income because this approach both increases people's capacities and reduces vulnerability. They see asset-based welfare as a crucial part of a preventative strategy which can reduce and ultimately abolish poverty. Proponents would argue that as a complement to current policies the Child Trust Fund will play an important part in improving life chances and tackling poverty of ambition and opportunity.

Again though the question is whether or not boosting assets should be the priority. We probably know more about the impact of children growing up in families with low incomes. Children living in poverty are: less likely to do well at school; less likely to stay on at school after 16; at greater risk of low pay and unemployment later in life; more likely to become drug or alcohol dependent; as boys more likely to get in trouble with the police and as girls more likely to become a parent at a young age. The money for the Child Trust Fund has to come from somewhere and it is money that could be spent in another way. Some have suggested that the funds would be better spent on continuing to boost incomes or addressing what appear to be more pressing issues.

The Institute for Public Policy Research, which has led on much of the thinking around asset-based welfare, estimates that government coffers will be as much as £400 million lighter per annum with the birth of the baby bond. To some this seems profligate when considered against the existing 'to do' list. Just one oft quoted example; for many anti-poverty campaigners, the most pressing need is for reform of the social fund. It is now almost two years since the then Social Security Select Committee published a detailed and considered report on this issue. The cross-party committee concluded that unless radically reformed the social fund would undermine the Government's strategies to tackle child poverty and social exclusion, that the social fund needed an urgent overhaul and injection of cash. Shouldn't this be a priority?

Perhaps the greatest concern that some have is the assumption the policy makes that the poor can afford to save

For the sceptics it is not just a question of priorities. Some are also wary of some assumptions underpinning asset-based welfare. Most importantly, whilst asset-building initiatives can be a positive response to poverty and inequality, such initiatives could become a distraction or diversion from addressing root causes. Perhaps the greatest concern that some have is the assumption the policy makes that the poor can afford to save. Many people find this assumption counter-intuitive because it invites the response: 'If they can afford to save, can they be poor?'

The reasons why people save are complex, with different theories, differing assumptions and conclusions. Whilst there are undoubtedly psychological factors that influence motivation and attitudes towards saving, economic factors must ultimately be the key determinants. This is not to say that strategies to influence behaviour are invalid or cannot work, but instead to emphasise that immediate needs and the means to meet them are largely dictated by resources in the form of cash. As Martin Barnes, Director of the Child Poverty Action Group has argued:

'It is difficult to find the means to save for a rainy day if the roof is already leaking and the walls are damp.' [Footnote 4]

It is clear that the debate around asset-based welfare has moved on; we now know that the Child Trust Fund will be implemented and ensuing discussions must reflect this new reality. There is a need to recognise the common ground between proponents and opponents of asset-based welfare: we know that the Child Trust Fund will not directly attack child poverty measured in terms of income but by the same token it could play a part in both reducing intergenerational poverty and in improving outcomes for children from low-income backgrounds. If we take a step back from the debate it remains remarkable that the Government is implementing a radical new policy and a long-term one at that – who says that they never take risks?

Claire Kober is Campaigns Co-ordinator for End Child Poverty

Asset-based Welfare and Poverty is published by End Child Poverty and IPPR. A pdf version is available on End Child Poverty's website www.ecpc.org.uk or a hard copy can be obtained by calling 020 7470 6131.

Footnotes
1. Inland Revenue, 2002,
http://www.inlandrevenue.gov.uk/stats/personal_wealth/menu.htm [back to text]
2. IPPR, 2002, Wealth Distribution – the evidence, http://www.ippr.org [back to text]
3. M Sherraden, Assets and the Poor, Shapre, 1991 [back to text]
4. C Kober and W Paxton, Asset-based Welfare and Poverty, NCB, 2002 [back to text]

Poverty 115, Summer 2003