There's one way for Gordon Brown to keep those pesky Labour and union lefties onside, and it's called asset-based welfare

Unlike his neighbour, Gordon Brown shouldn't worry about his legacy. He already has one: the creation of asset-based welfare. If he has any sense - a question on which I feel it right, for now, to suspend judgement - he will strengthen that legacy in the Budget next Wednesday. After all, it's those pesky Labour and union lefties he needs to keep onside for the coming months, not middle-class floating voters.

Asset-based welfare means giving poorer people help with building up capital rather than just giving them benefits and tax credits. Some right-wing ideologues think it should be the only form of welfare, but that shouldn't stop the left embracing it.

Government support for asset-building is nothing new. Tax exemptions have long been used to encourage pensions, home ownership, savings and shareholding. They have two drawbacks. First, they are regressive: the poor don't pay as much tax as the rich, and don't have as much money to sink into the assets. Second, they are mind-bogglingly inefficient, as they subsidise people who would save and invest even without state incentives. Many ISAs (individual savings accounts), for example, provide a tax-exempt umbrella for shares already held.

In 2001, Brown announced two schemes to help poorer people build up assets. The first was the Child Trust Fund or "baby bond", whereby, for every child born since 2002, the state pays £250 into a tax-exempt account that cannot be touched until the child's 18th birthday. The government adds another £250 when the child is seven and those sums are doubled for low-income families. Others, such as parents and godparents, can add to the pot.

Unlike Margaret Thatcher's discounted council house sales - the only previous example of state-supported asset-building that helped the less affluent - the baby bond has received little celebration or gratitude.Yet, in 2020, according to calculations by Sonia Sodha of the Institute for Public Policy Research (IPPR), 18-year-olds from poor homes could scoop a windfall of £1,659 even if their families add nothing to the fund. If they add £16 a month - which, according to Sodha's admittedly unrepresentative research, is the average so far put in by low-income families - the final sum could be £6,641. To the one-third of the population that had less than £5,000 in marketable wealth in 2003, it will seem riches beyond avarice. Such are the miracles of compound interest. Even assets of a few hundred pounds at age 23 are associated, according to the National Child Development Study, with better jobs and better mental health ten years later.

No doubt the Daily Mail - which you will probably be able to get beamed directly into your brain by 2020 - will have pictures of inebriated teenagers recklessly "spending their Gordon" in a single night. But we at the NS will bring you heart-warming tales of working-class youths opening organic restaurants or buying smallholdings.

The Child Trust Fund, however, still has an element of inefficiency or "deadweight", as economists call it. Despite the extra state contributions for children from low-income homes, many benefits go to those from more favoured backgrounds, whose parents might well have saved for them in any case. That objection does not apply so forcefully to Brown's second scheme: the savings gateway, which is still at the testing stage.

The idea is that people on low incomes save, say, up to £500 in an account over two years and the government adds, say, 50p for each £1. Again, the sums may sound trivial but they can make the world of difference to people whose finances are so precarious that they dread the breakdown of a washing machine. "I didn't feel so panicky," one beneficiary said.

As a new IPPR report by Sodha and Ruth Lister notes (The Saving Gateway: from principles to practice), three in every ten of those in pilot studies lived on incomes of less than £100 a week, and more than half did not previously have savings. Fears that they would borrow money to grab the state bounty proved unfounded: more than 90 per cent saved from their regular income.

The IPPR wants the savings gateways rolled out nationally and offered mainly through familiar local organisations such as housing associations, which low-income families trust - wisely, in my view - far more than the avaricious banks. It also wants Brown to make baby bonds more egalitarian by adding further top-ups when children reach 12 and 16 and weighting the government's contributions more to those from disadvantaged backgrounds, particularly children in care.

I hope that Brown listens. UK wealth inequality is twice as big as income inequality, and new Labour appears to have done little to reduce it. Baby bonds and savings gateways - classic Brownian devices, combining redistribution with incentives to prudence - are small steps to closing the gap.

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