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Capital in the wallets of babes Samuel Brittan: Financial Times 10/04/03 The potentially revolutionary measure in this year's Budget is one that costs relatively little. It is the provision for a child trust fund - inevitably christened "baby bonds". Under this initiative, each newborn infant would be provided with a small capital sum - £500 for the poorest third of families, falling to £250 for the rest - that would be invested in the financial markets and on which the bearers would be free to draw from the age of 18. The annual fiscal cost is put at £230m - some £350m for 2003-04 because of backdating to last September. The cost is a tenth of the additional sums provided this year for the Iraq war. Moreover, it will have a negligible macroeconomic effect in view of the 18 years before the sums can be drawn upon. The revolutionary aspect is that for the first time a British government is committed to distributing capital to citizens as distinct from welfare in kind or social security payments. It is half a century since Anthony Eden, the former Conservative leader, used to talk about a "property-owning democracy". But nothing very much was done to achieve this goal apart from housing and mortgage subsidies, which distorted the property market and the general economy far more than they effectively redistributed wealth. I have long thought that Karl Marx made the wrong criticism of privately owned wealth: it is surely not that it exists but that too few of us have it. The ownership of a little nest egg to tide people over bad luck, to avoid their becoming complete wage slaves and to give them some opportunity to opt out for a while from the rat race, was a privilege of the traditional middle classes celebrated in 19th-century novels. An extension of such privileges to all would be a far more revolutionary step than anything in the communist manifesto. It was a pleasant surprise to find such proposals incorporated in the Labour 2001 election manifesto. The idea had been promoted by several left-of-centre authors, including Julian Le Grand of the London School of Economics. But it has attracted radicals across the political spectrum. Two US authors, Bruce Ackerman and Anne Alstott, had espoused it in their widely discussed Stakeholder Society. David Owen canvassed it for the Social Democrats as early as 1984; and David Willetts, the Conservative social security spokesman, has promoted it under the title "asset based welfare". But it was widely feared that, as the proposal did not have the backing of a powerful lobby, it would fall by the wayside at a time of fiscal pressure. It would have been so easy for Gordon Brown to have postponed the project indefinitely and it is to his credit that he has not done so. The big weakness, of course, is that the trust funds are small. The Treasury had originally suggested that with further modest contributions from the exchequer at later ages, and a 5 per cent real return on equity, the capital stake could eventually be worth some £1,600 per head. This compares with the £56,000 recommended by Ackerman and Alstott and the £10,000 proposed by Prof Le Grand. These bonds are clearly a capital asset. If they are to be an important part of each citizen's birthright, rather than beer money, it will be essential to find a source of support other than general tax revenue. The American authors wanted to finance it from a 2 per cent general wealth tax and Prof Le Grand from inheritance tax stripped of the current loopholes that in effect make it a voluntary levy. There have in the past been capital transfers to the government that could have been used to boost a child trust fund. There were the proceeds from Conservative privatisations and from the Labour auction of mobile phone licences. In Alaska a scheme similar in spirit gives each citizen a dividend from state oil revenues. It is important that those who really believe in citizen capitalism - a genuine third way between endless increases in public spending and laisser-faire distribution of capital - carry on tub-thumping in support of the child trust fund initiative. With tight public finances and uncertain growth prospects, it is the macroeconomic aspects of this Budget that will receive most of the attention. But the baby bonds are potentially far more important - if we want them to be.
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