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5 May 2003

A turning point for the welfare state

What about a proper inheritance tax? And state-provided assets for everybody to use when they wish?

By Matthew Taylor

As always, the Chancellor needed a rabbit to pull from his hat on Budget day. This year it was the Child Trust Fund. All babies born after September 2002 will have £250 paid into an account by the government – £500 if they are from low-income families – with top-ups likely when the child is older. The children will get their hands on the money when they turn 18.

To some, this may look like a gimmick. But it represents something far more important: the left’s rediscovery of the idea that the proper aim of a social democratic welfare state should not be merely to provide a safety net in times of crisis. Instead, it should try to ensure that all citizens have enough assets or property to enable them to take control of their lives. In other words, it should be as much concerned with the distribution of wealth as it is with the distribution of income.

Anthony Crosland wrote in 1956 that “a more equal distribution of wealth will be needed to produce any given degree of equality in visible living standards”. He would be disheartened by how the gap between the “haves” and “have-nots” has grown. The top 2.4 million households have £1.3trn of wealth, while the bottom 12 million households possess only £150m. In 2000, a quarter of the population had assets valued at less than £200.

This poses an enormous challenge for progressives. People aspire to ownership, as the popularity of the “right to buy” policy for social housing showed. Moreover, Aristotle, Locke and Rousseau all argued that property or asset ownership were necessary for full citizenship. Property, they said, gave people a stake in society, and fostered responsibility and autonomy. These thinkers were arguing that the propertyless should be denied the rights of citizenship, including the right to vote. Social democrats turn the argument on its head, insisting that every member of society should possess the wealth and opportunities on which citizenship depends. Asset-based welfare, they say, should become a new pillar of the welfare state, alongside income transfers, the provision of public services and full employment.

There are two main avenues for achieving this asset-based welfare state, so that wealth is spread more widely right across the social spectrum.

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The first is to tackle the taxation of wealth, particularly inheritance tax. In 2001-2002, death duties added only £2.35bn to the Treasury coffers out of a total of more than £25bn bequested – less than 10p in the pound. Exemptions and loopholes make death duties in effect voluntary for the well-advised middle classes. Thus, death duties fail to reduce inherited privilege and do nothing to create a more equal distribution of wealth.

The solution is clear. Instead of taxing the estate of the deceased, as we do now, we should tax the person who benefits from the inheritance. If there were also a lifetime gifts tax, to cut down on avoidance, it would then become pointless for people to hand down large sums to a single beneficiary. Assuming that people preferred to keep their money out of the Treasury’s hands, the incentive would be for them to make wills that spread their largesse as widely as possible.

The obvious objection to such a reform is that the public would not stand for it. “Middle England” complains about paying even the death duties that exist now, with rising house prices causing more estates to move up above the £250,000 exemption threshold. The right clamours for a dramatic increase in the threshold – even for the abolition of death duties. On the one hand, people profess a desire for social justice; on the other, they naturally want to help their children as much as they can. It is a contradiction that few politicians dare to confront.

But public attitudes are not as fixed as pessimists believe. Many 80-year-olds, with children in their fifties who are already wealthy and established, wonder why they should fret so much about handing their money down. According to some pre- Budget reports, the Chancellor recognises this and at one stage considered biting the inheritance tax bullet.

The second way of building asset-based welfare is to extend the model of the Child Trust Fund. To some extent, this has already happened. The UK is moving towards private pensions (a form of individualised asset-building) and in September 2000 it introduced Individual Learning Accounts to allow people to meet the costs of education and training during adulthood. (Although ILAs failed the first time around, they will in all likelihood make a return.) Through the Saving Gateway, the state matches savings put aside by low-income families.

But too many of our present policies for encouraging people to save and to build assets increase inequalities rather than reducing them. Most incentives come in the form of tax relief on life insurance, pensions and so on, and so the higher earners get the biggest support. Approximately half of all tax relief – amounting to £9bn for pensions alone – is received by the wealthiest tenth of the population.

The aim instead should be to spend broadly similar amounts of money to support the asset accumulation of each citizen. This may not sound terribly radical. Yet the effect would be revolutionary because the billions that now go on tax relief would be spread evenly across the population.

What looks most attractive in the long term is to deposit all assets that come from the state in a simple, widely available, portable single account structure. This could bring together accounts that would be used not only for education and old age, but also for a family crisis or a sudden change in circumstances – the loss of a job or the arrival of a baby, for example. While the welfare state has been quite effective at transferring resources to people as they go through foreseeable life changes such as childhood and retirement, it has not been so good at helping people cope with the unexpected. The discretionary Social Fund – which is supposed to help those on low incomes through hard times – is universally derided. It may just about see individuals and families through the worst of a crisis, but it does not help them to bounce back. People need access to more substantial assets that can be used more flexibly.

So rather than leave people as passive recipients of bureaucratic largesse, how much better to give them a “life account” – their own contingency fund which, up to certain limits and under light controls, they could use as they themselves judged necessary. Instead of benefits kicking in only after a particular crisis event, people could draw forward or defer entitlements according to family circumstances. If one partner suffered a reduction in earnings, the family might seek an advance on its childcare resources to allow the other parent to look for work. Families and individuals would be able to smooth out their financial capacity over time and mould their entitlements in response to economic change and insecurity, without being locked in to a rigid set of guidelines and categories set by a government department.

The principle has been tried abroad. The Australian Labour government of 1983-96 pioneered the flexible use of social security accounts. Recipients of the Basic Family Payment were allowed to gain access to part of their entitlements as a lump sum; similarly, people on unemployment benefits were allowed to capitalise part of their future income support payments as a way of moving from welfare to work.

Thus, the Child Trust Fund, far from being just another rabbit from the Brown hat, could prise open a whole new policy agenda. Future generations may look back on Brown’s “Budget gimmick” as a turning point for the welfare state and for the thinking of the social democratic left.

Matthew Taylor is the director of the Institute for Public Policy Research. An IPPR report, Equal Shares?, edited by Will Paxton, will be published on 7 May

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