Child Trust Funds and the Logic of Investment

May 24, 2010

David Laws is Chief Secretary of the Treasury. That’s number 2 to George Osbourne, Chancellor of the Exchequer. The two of them have just begun to implement some £6 billion in cuts from public spending. This sounds sensible. After all, we do have a national budget deficit of around £150 billion, or 11 percent of GDP. So why not get slashing?

The problem is that for the economy to recover (and tax receipts with it), there needs to be two things. First of all, there needs to be investment in future production. And, alongside that, pushing it along like a breath of wind, there has to be enough money available to consumers to inflate demand. Otherwise, the products of investment aren’t consumed, economic growth fails to materialize and you’ve wasted an ocean’s worth of money.

This logic is alien to Laws and Osbourne. They see the priority as deficit reduction. The UK government needs to reduce spending, balance its books, and then the free market will see to economic recovery. That is, private companies and budding entrepreneurs – you and me perhaps – will reinflate the economy, sending us soaring back into prosperity.

In reality, this is not at all logical. Without sufficient demand in the economy, entrepreneurs will struggle to grow their businesses. Without investment in skills and infrastructure, the technologies that the world will need in ten or twenty years time will be produced by other peoples. With credit now extremely hard to come by in the private sector, venture capital alone will do nothing to create the conditions in which such industries can thrive.

I mention all of this, which is hopefully common sense, as one of the major areas to be cut by the ConDem coalition will be Labour’s “Child Trust Funds.” CTFs were introduced by Labour, partly as a bribe to middle class mothers, but also with a logic behind them. Relatively small payments were to be made into accounts for all new borns, with larger payments for children from poorer households and those with disabilities. The money would become available when the children turned eighteen, and could then be used to fund further education or job training.

The government claims that cutting such payments will “save” £520 million. As David Laws explains it

“At present, the child trust fund is based on the claim that young people will build up an asset which they can use later in life. But since government payments into the scheme are essentially being funded by public borrowing, the government is also storing up debts which will have to be repaid by the same young people.”

This is a pretty straightforward piece of nonsense. Essentially, Laws is making an excuse for cutting a scheme to which neither the Tories or the Lib Dems are committed. But it is useful to unpack his logic nonetheless.

In Laws’ world, government spending cannot have the effect of stimulating economic growth. That’s the implication of equating child trust funds to borrowing from the taxpayer. But this is a fallacy. If the fund is used to purchase training, which equips the student with a skill that is in turn used to produced items that are in demand, and useful, then the taxpayer has benefited. Magnified across society, the fiscal benefits of paying for such training compared to what would happen should such training cease, are immense.

This is called investment. It means to pay money over the long term, so that future gains can be realised. It involves medium to long term thinking and a certain degree of planning. Historically, companies and government have accepted a need to work together to make investment work, sometimes with marvellous results (such as railways, roads, hospitals, schools).

Child Trust Funds were just such a scheme. As David White of the Children’s Mutual tells the BBC, “this sort of short-term cut does not address the pressing need for families to save, or recognise the significant benefit to society that the Child Trust Fund will bring from 2020 as maturing funds return an anticipated £2.96bn each year to the economy.”

Unfortunately, the CSTs are only the first of many such sacrifices to the ideology of the government. At a time when it is essential that ordinary people have enough money at their disposal to keep high streets running, and people in jobs, the government is slashing public investment, cutting jobs and benefits. All of this is unwise.

Although supporters of fiscal balancing may seem reasonable, they are in fact extremely dangerous and massively illogical. They are, essentially, arguing that we must sacrifice future growth in the interest of short term stability (the kind demanded by international bond markets), and their policies are storing up huge problems, not least in the race to develop sustainable economies and the transition from oil.

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4 Responses to “Child Trust Funds and the Logic of Investment”

  1. watsonlow Says:

    Just as there are climate change deniers so too there is a coterie of money printers who think the deficit will go away on its own. Everyone is an amateur economist these days. Nobody trusts anyone apart from His Vinceness to plan the economy, and his colleagues in government have him tucked away in a corner. I never liked the Child Trust Funds because they were a poor excuse of a solution to society’s ills. They were just another New Labour gimmick. It is a fact of life that the nation needs to square away its creditors. It is not some evil capitalist trick to repress the working class. That being said, our creditors will be indulgent if they see that we are on a sustainable track. There is no urgent need to cut but there is an urgent need to present a credible long term plan involving reducing public expenditure, increasing taxes and investing in long term viability. This latter is the hardest to define, requiring a cogent analysis of where we are and where we want to be. I don’t see any politicians attempting this in a useful way. The people in power are too busy holding their coalition together and the Labour Party is about to elect some ghost of a bankrupt recent past.

  2. Szamko Says:

    “It is a fact of life that the nation needs to square away its creditors. It is not some evil capitalist trick to repress the working class.”

    Perhaps. But here’s a professional economist talking about the American situation this year:

    “Larger deficits in the current economic environment will only increase output and employment. In other words, larger deficits will put many of our children’s parents back to work. Larger deficits will increase the likelihood that parents can keep their homes and provide their children with the health care, clothing, and other necessities for a decent upbringing. But the deficit hawks would rather see our children suffer so that we can have smaller deficits.

    “In spite of the deficit hawks’ whining, history and financial markets tell us that the deficit and debt levels that we are currently seeing are not a serious problem. The current projections show that, even ten years out on our current course, the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country’s history.”

    That’s Dean Baker by the way, writing in February. He, like me, takes a broadly Keynesian view of economics. You, it seems, don’t. I believe that he’s right. What we need now is stimulus to cope with excess supply, and a stimulus heavily weighted to green measures.

    There is no need to kowtow to creditors. They keep lapping up government debt, as it is a safe bet. They will only be reassured by expressions of long term thinking, but short term speculative capital, that’s a different story. I think that the Tories and Lib Dems are making policy for the speculative markets, not for long term bond investors, hence the urgency to cut. And given the background of the cabinet, it’s not unreasonable to argue that they are delighted to farm off public functions to outsourcing firms.

  3. watsonlow Says:

    I think Keynesian economics led to an expansion of economic imperialism. It was simply a fact that there were many raw materials still to be pillaged and ample cheap labour to be exploited inside and beyond the borders of the USA and Europe. A handy European war, then Korea, Vietnam, Iraq and Afghanistan helped impress on the dubious the need for the imperialist nations to reinforce their living standards at the expense of the poor. Like you I doubt whether Osborne looks beyond today’s markets. If these jokers continue in this vein people will soon be looking back on Greece 2010 as the first domino.

  4. Rem Says:

    Hello I just wanted to say thank you for this blog. Thank you for trying and preventing people from thinking in circles. Good work keep it up!


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