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COVID 19 and the Child Trust Fund

Rajiv Prabhakar

22.06.2020

Young people are likely to bear much of the economic fall-out from Covid-19. The education of young people has been disrupted by the closure of schools and colleges. Youngsters also work disproportionately in sectors badly hit by Covid-19 such as hospitality. There is concern about the ‘scarring’ effects of a lack of employment opportunities for future employment and pay.  

Emergency income payments have been part of the global response to Covid-19. There is also a previous case of targeting special help for young people. The Blair government provided a £250 endowment (or £500 for those from low income backgrounds) into an 18-year account for all babies born from 1 September 2002. Originally, family and friends could save up to £1,200 a year into these accounts. From September 2020, the first generation of these Child Trust Funds begin to mature.

New Child Trust Funds were an early casualty of the Conservative-Liberal Democrat coalition government’s austerity cuts to public spending in 2010. However, existing Child Trust Funds (or replacement Junior ISAs) could be used to channel additional emergency payments to the Class of 2020. Payments into these accounts would revisit earlier conceptions of the Child Trust Fund as a capital grant rather than a savings scheme. These might be funded by taxation on wealth rather than extra borrowing, to avoid recipients facing higher taxes later in life.

One practical challenge to using Child Trust Funds in this way is that there are a large number of dormant or ‘lost’ accounts. But the UK government provides help in retrieving accounts. The central advantage of using Child Trust Funds for this purpose is that the infrastructure is already in place: young people have accounts and so are already ‘banked’ and can receive the payments.

Another possible objection is that payments would only go to those turning 18 and so would exclude other young people. But there is a case for help at this particular point, when the decision to continue in education or training, or to leave and try to get a job, is made.  

The rise and fall of the Child Trust Fund

The fate of the Child Trust Fund mirrors the rise and fall of ‘New Labour’. In the run-up to the 2001 general election, Tony Blair was looking for high-profile proposals to put in Labour’s manifesto. Around that time, two centre-left think tanks the Fabian Society and Institute for Public Policy Research both published pamphlets proposing a capital grant for young people. The fact that two different think tanks proposed a similar idea seemed to catch Blair’s attention.

After Labour won the 2001 general election, a small number of ministers at the heart of New Labour worked with the Institute for Public Policy Research to develop the Child Trust Fund proposal. This involved the Secretary of State for Education and Employment David Blunkett, Chancellor Gordon Brown, and Blair. There was little discussion of the Child Trust Fund idea within the wider Parliamentary Labour Party or the wider labour movement. This perhaps exemplified Blair’s ‘sofa style’ government. Initially, Blunkett led on the Child Trust Fund idea and showed interest in it as a contribution towards active citizenship. But Brown ultimately took charge of this policy and it was absorbed into the Treasury’s savings agenda.

A New Labour clique was responsible for introducing the Child Trust Fund. This meant that the Child Trust Fund’s fate was tied closely to that of New Labour. It did not gain deep roots within the Labour party or the wider society and proved to be as quick and easy to topple as it was to erect. One of the first acts of the Conservative-Liberal Democrat coalition government was to stop the government endowments into Child Trust Funds from January 2011 (with an exemption for children in local authority care). The Conservative-Liberal Democrat government also created a Junior ISA policy as a replacement for the Child Trust Funds. Existing Child Trust Funds could be transferred into Junior ISAs. Junior ISAs marked the end of the capital grant policy and its change into a simple savings product.

A reborn Child Trust Fund?

Emergency payments have been a key part of policy responses to Covid-19. Covid-19 has fuelled calls for a universal basic income to help people cope with the economic consequences of the coronavirus. In the United States, emergency direct payments of $1,200 are provided to each person and up to $500 for each child up to 16 (although these are tapered off for those on high incomes and no payments are made for those with an income above $99,000 a year).

The forthcoming maturing of Child Trust Funds gives an opportunity for helping a generation of 18 year olds. There is room for debate about the size of any payments, as well as for how long such payments would be made. Other help might also be targeted at young people who are older than 18 and do not have a Child Trust Fund. But the exceptional challenges facing the Class of 2020 warrant exceptional help.

Dr Rajiv Prabhakar is a Senior Lecturer in Personal Finance at the Open University. He is the author of Financial Inclusion: critique and alternatives to be published by Policy Press in 2021.

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