Led by Tory Leader David Cameron in partnership with the Liberal Democrats and Nick Clegg, a new government has taken power in the UK, ending the Labour Party's 13-year run. Last week, the new coalition government announced a series of budget cuts to existing programs that were expected to save $9 billion in the near term. It was also a signal that the new government is open to revisiting the social policy framework that had taken shape in recent years. One of those destined for the chopping block was the Child Trust Fund (CTF), an innovative policy which has provided a savings account for every child born in the UK since 2002.
Since I have often used the UK experience with the CTF to make the case that the US should pursue a similar, universal children's account policy, here is my perspective on these developments across the pond.
Although it had proponents across the political spectrum, the CTF policy was incubated and implemented by the Labour government as a means to promote asset-based welfare (a relatively new approach to social policy that recognized the role of assets as a compliment to income). The policy goals of the CTF were to expand ownership, increase economic opportunity, and promote the savings habit, particularly among families with lower incomes. Since the policy was announced, a national curriculum has been developed to link the accounts to the delivery of financial education in the schools. Along with pension reform and tax reform, the CTF was one of the primary initiatives pursued in recent years to promote savings across the life course. Although the first recipients have just reached primary school age, the policy was already generating a range of valuable insights.
During the recent election campaign, as the issues of fiscal austerity and government priorities became primary sources of debate, each party made different commitments to the CTF. Labour planned to keep it ("its working"), the Tories pledged to roll it back to serve the poorest families ("its not affordable given current conditions"), and the Liberal Democrats proposed scrapping it ("other programs are more important"). As it turned out, the new coalition adopted the Lib Dem policy and sacrificed the Tory pledge to protect it for the poorest third of households.
Here are a several points to keep in mind to contextualize this somewhat surprising decision.
First, this decision was not based on a perceived failure of the policy but rather was motivated by politics and unfolding debates about responding to the current fiscal crisis. The policy was initially incubated in think tanks on the left and the right but adopted and implemented by the Labour government under the leadership of Tony Blair and Gordon Brown. The Tories supported it, somewhat tepidly, as they saw benefits in spreading access to capital and promoting a savings culture. The Liberal Democrats opposed it, arguing that there were other programs they preferred to fund. But Lib Dem opposition also provided a means of differentiating themselves from Labour and withholding their endorsement on what would be one of Labour's most significant progressive achievements. There are many rank-and-file members of the Lib Dem party who support the CTF policy specifically and the asset-based approach to welfare policy generally. Furthermore, there is now concern among a growing number of Lib Dems that in entering a coalition with the Tories they are shifting from a center-left party to a center-right one, and moving the country along with it.
Second, there is a good deal of evidence that the policy was working. CTF accounts are being opened and receiving contributions. Three-quarters of parents proactively open accounts on behalf of their children after receiving the government voucher. Those that don't act have accounts opened for them automatically. There has been criticism that this 25% is too high; in fact, this has been the major criticism levied against the policy. Yet the 75% take-up rate compares quite favorably with other savings products available in the UK, such as tax-free savings accounts or retirement accounts, which are held at far lower levels. The fact that 100% of children have accounts opened within a year is a major policy achievement, and shows the promise of designing policies that build on the insights of behavioral economics. Accordingly, some advocates claim it is the most successful financial initiative the country has ever seen since it is not just the well-off that are participating. Currently, there are over 4.5 million accounts in the market, a quarter of which had received additional contributions. Total assets held in these accounts exceed $3 billion. One provider of accounts has data that shows 30% of low-income households typically save an additional $30 a month for their children through the Child Trust Fund accounts. Since this was an unprecedented policy, it is hard to assess whether the contribution rates are higher or lower than expectations. However, it appears clear that there has been more savings performed on behalf of children than they would have been without the policy. Additionally, as the first recipients begin to enter primary school, it is expected that their engagement with their own accounts will increase and savings levels will go up even more.
Third, the decision to eliminate the CTF is a contested decision. The policy did not have a high profile among the broader population but was gaining in popularity. Public opinion work showed that it had the support of parents and a growing number of others in the general public. Think tanks and other commentators from the left to the right have argued that sacrificing long-term asset policies would be the wrong type of spending cut for any government concerned about wealth inequalities and social mobility. The new government has opened itself to criticism by stating that it wants to see families save more and borrow less, but then cutting part of the welfare system that encourages this type of behavior. While the political structure of government over there provides wide latitude for the ruling party to implement its policy program, it is possible that public support could grow to resurrect the policy in the future. In Wales, the national assembly previously decided to use their own funds to increase contributions to CTF, and support for the policy there remains strong. On the other hand, the enduring and unfolding fiscal and economic crisis will create new obstacles for policymakers. This may be the beginning of a process whereby the UK and other European countries revisit the basic parameters of their social contract.
Finally, the Child Trust Fund was a policy designed to change long range outcomes and needed to be assessed over the long term. But far sighted government is difficult (this is true on both sides of the Atlantic). Although the implementation of the CTF was far along, the policy was still in its infancy. The first cohort of recipients is just about to enter primary school. In some respects, the policy could not prove its worth until the first initial account holders turned 18. That was still 10 years away. I think there will be regrets that the new coalition government decided that this was too long to wait. Importantly, there are other policies which were developed within the asset-based welfare framework which continue to receive support. The Saving Gateway is scheduled to be rolled out nationally later this year after being extensively piloted; it will provide matched savings accounts to recipients of a wide array of public assistance. It is a policy akin to making sure everyone who qualifies for unemployment insurance, SSI, food stamps, and the Earned Income Tax Credit receives a matched savings account. That said, the CTF was the universal policy, the one that held great promise because it was reaching all children early in life. There is still much to learn from the CTF experience. It will be interesting to track the 8-year cohort of children that received accounts as well as see how the Welsh government may continue the program in some capacity. Still, it is highly disappointing and unfortunate that the policy has lost the support of the new coalition government.