The Lib Dems and the Child Trust Fund - a lesson for starry-eyed progressives

Nicholas Pearce
24 May 2010

In the euphoria with which centrist and leftish liberals greeted the formation of the new Coalition government, scant attention was paid to issues which traditionally concern social democrats and egalitarian liberals: welfare state entitlements, progressive taxation policy and public services, in particular. Because of the prominence given to civil liberties, democratic reform, and the novelty itself of the formation of a partnership government, these basic instruments of social justice were largely ignored by the liberal commentariat in their reviews of the new Coalition's programme. Today's announcement of over £6 billion of spending cuts in 2010/11 brings them back into sharp relief, however, and shows just how far the Liberal Democrats have moved in recent years to the centre-right on fiscal and social policy.

In the coalition negotiations, the Liberal Democrats held fast to their policy of raising the personal income tax allowance to £10,000. On its own, this is not a progressive policy, since it largely benefits middle and higher income taxpayers. Tax credits do a better job of helping low income families. But the Liberal Democrats could claim - with some plausibility - that their overall pitch to the electorate was progressive, because changes to the personal tax allowance would be paid for by increases in taxes on the wealthy: abolition of higher rate tax relief on pension contributions, a Mansion Tax on properties worth over £2 million, and so on. In the event, however, few if any of these taxes survived in the negotiations with the Conservatives: only an increase in Capital Gains Tax and an unspecific commitment to tackling tax avoidance did so. This left the Liberal Democrat package denuded of much of its progressive content.

In addition, the Liberal Democrats took the opportunity of the coalition negotiations, and the surrounding turbulence in European markets, to shift allegiance out of the broadly Keynesian camp on fiscal policy for 2010/11, in which they had fought the election, towards the Conservative position of prioritising immediate deficit reduction above demand stimulus. Today's cuts confirm that repositioning, with David Laws installed as the deficit hawk in chief at Her Majesty's Treasury. Of the £6.2 billion cuts, only £500m will be reinvested in growth enhancing investments. Vince Cable will shoulder a large slice of the rest.

One cut bears witness to a consistency in the Liberal Democrat position, however: the abolition of the Child Trust Fund. Introduced in 2002, the Child Trust Fund is the world's first universal savings and asset accumulation policy for young people. Every child is paid £250 at birth, and then again at age seven, into an account that is locked away until he or she turns 18. Children from low income homes get double payments, and additional sums are contributed to the accounts of children with disabilities. Contributions from families of up to £1,200 a year can be made into the fund tax free. 

This policy is important normatively, in the sense that it affirms that all citizens should be entitled to a minimum asset stake, and that social justice will be strengthened if each young person, and not just those from better off homes, has the ability to start out in life with some independent resources of their own. And it is important theoretically, because it places the equitable distribution of asset holding at the centre of social policy, rather than just income transfers, such as benefits and tax credits, vital as they are. As such, the Child Trust Fund had the potential to foreshadow a wider transformation of the welfare state, in which the possession of wealth and assets would become an increasingly central tool of social justice strategies. That is indeed how many social policy theorists in the UK and elsewhere saw it.

Unfortunately, this is not a view shared by the Liberal Democrats. They have pledged for some years to abolish the Child Trust Funds, on various grounds (today the stated reason Laws gave is that endowing people with an asset is dishonest when public debt is high, a justification which would surely extend to the higher rate tax reliefs for savings into pensions and ISAs that cost billions more than Child Trust Fund payments?). They have persuaded their coalition partners not just to restrict Child Trust Funds but to abolish them completely from 2011.

It is to be hoped that if a progressive minority exists in the House of Commons, it can be marshalled behind the ranks of Labour Party MPs to oppose this cut.  Indeed, it will be a useful test of the progressive credentials of the parties left out in the cold of the coalition deal making of those early days of May.

Of course, it should be said that none of this is to deny the importance of the classical liberal agenda for restoring civil liberties and securing further democratic reform which the Liberal Democrats took into office with them. But if a lesson in the limits of liberalism was ever needed for the starry eyed on the centre-left, today's announcement supplied it.

Nicholas Pearce is former head of the Number 10 Policy Unit.

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