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  1. Politics
14 February 2000

All shall have wealth

Gavin Kelly argues that, if it were to give every young adult a capital sum, Labour would promote eq

By Gavin Kelly

Think of the things that can give the offspring of the affluent an advantage in life. They include a good education, high-quality housing, healthy and safe neighbourhoods, high expectations. But we should not forget the more prosaic issue of wealth. Affluent parents use their assets to help their children in a variety of ways: the trust fund, inherited property, the down- payment on the first home and the helping hand when things go wrong. Wealth is a springboard to opportunity.

In the past, the left, believing that all property is theft, tried to find ways of restricting wealth. Now that this levelling-down perspective has truly passed its sell-by date, the left needs to replace it with something more compelling than silence.

The answer, for a government concerned with opportunity and equality, is to promote, rather than discourage, the holding of assets, including financial wealth, but to aim at spreading them across a far wider section of the population. There are several arguments for such a policy. First, asset-holding improves life-chances, through better labour-market performance, better health and better child educational attainment. Further, an inheritance of £5,000 more than doubles the chances that a young person will start his or her own company.

Second, rising levels of wealth inequality are reinforcing income inequality. Since 1979, the contribution that investment income makes to income inequality has increased almost fourfold. As many as 50 per cent of the population have less than £500 in savings. The proportion of the population that doesn’t own any assets at all actually doubled between 1979 and 1996 – from 5 to 10 per cent. So much for the new right’s version of popular capitalism.

Third, an asset-building agenda could help the government’s strategy for “positive welfare”, which concentrates on preventing people from falling into the conditions that lead to dependence on benefits, rather than on financing such dependence.

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Fourth, spreading wealth offers a new way of responding to the challenge of a more individualistic age. The government can steer the public’s desire for greater personal autonomy in a progressive direction.

The present problem is not that we lack an asset-building policy in the UK. On the contrary, we have a plethora of policies for pensions, employee share ownership and savings, through such schemes as Peps, Tessas and now Isas (individual savings accounts). But these policies rely almost exclusively on the tax system to encourage asset-building (what Professor Richard Titmuss called the “fiscal welfare state”) and therefore primarily benefit the affluent. Labour has made some moves towards a different approach, involving the direction of assets more to those who need them most. For example, it has scrapped tax relief on mortgage interest payments while introducing individual learning accounts (Ilas) to promote training for the low-skilled. There has also been talk of giving capital grants to budding entrepreneurs in disadvantaged areas.

So if Labour is to develop these moves into a more encompassing policy and to hand out assets on a large scale, who is to benefit? Perhaps the most straightforward answer is to offer the asset to everyone of a particular age group – to ensure that, say, all 18 year olds or all newborn children receive a capital sum, a share of the nation’s wealth which they could use to shape their own life-chances. The alternative is to direct assets only towards the most disadvantaged so that the public purse, as well as being put to less expense, does not have to subsidise those who will already benefit from inherited wealth.

But when welfare is increasingly targeted at those at the bottom of the income-ladder, we have to keep some flagship policies in which middle-income groups feel they have a stake. Welfare for the poor typically means poor welfare. It may seem absurd to subsidise, say, the Duke of Westminster’s son, but a more restricted policy would exclude not just him but many young adults from middle-income households who have no certainty of any substantial inheritance or capital transfer from their parents. Means-testing a one-off capital endowment, moreover, could cause great resentment among those who just failed to qualify.

If we are to offer assets in this way, how should they be used? Libertarians argue that, once given a financial asset, people should be allowed to do with it as they please and to make their own choices and mistakes. A more conditional approach argues that the government should ensure that public money goes on investments that are likely to improve life-chances such as training and lifelong learning, entrepreneurship and, more controversially, home-ownership and higher education.

Experience overseas is illuminating. In the US since 1996, 27 states have passed legislation allowing for individual development accounts (Idas) and more than 150 such schemes are now running. The central idea is that the government matches money paid into the accounts by the individual (typically on a ratio of three to one). The accumulated funds are used exclusively for specified investment purposes – training, entrepreneurship and so on. Early evidence suggests that the schemes have been successful in promoting savings, financial security and a sense of economic independence.

But there are more ambitious approaches. One is to pay a capital endowment, of say £1,000, to all 18 year olds. On top of this, the individuals could make their own, tax-efficient, contributions that would attract matching contributions from the state on a means-tested basis (as with Idas). A variant on this would involve the government paying the lump sum when a child is born and then allowing parents to make additional contributions – again with a matching system for low-income parents – until the child reaches 18. Given the magic of compound interest, relatively small contributions could accumulate into a considerable pot of capital: £1,000 invested in the stock market in 1982, for example, would be worth £3,500 today. In either case, we would combine the inclusiveness of a universal approach with the redistributive benefits of targeting.

These ideas for what might be called opportunity funds go back to first principles. Opportunity, equality, autonomy and responsibility – the touchstones of progressive thought – are ideals that trip easily off the tongue. But they are harder to realise through policy. The attraction of asset-building policies is that they could simultaneously promote greater equality, opportunity and self-reliance. They would recast the economic and social contract between the individual and the state.

More importantly, they have the potential to become one of those rare creatures in British public life – a policy that is both highly progressive and intrinsically populist. Opportunity funds could become the kind of national institution that all politicians want to be seen building up rather than cutting back, a defining feature of a reformed welfare state based on the twin themes of preventing and tackling misfortune and poverty.

It is time for the left to create a new politics of private ownership on its own terms.

The writer is senior research fellow at the Institute for Public Policy Research. He is author (with Rachel Lissauer) of “Ownership for All” to be published by the IPPR later this month