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Should the Child Trust Fund be abolished?

Observation

The oldest children to receive a Child Trust Fund from the Government today celebrate their seventh birthdays. Alongside their other presents, the Government is making a further contribution to their accounts - those in families receiving a full Child Tax Credit award get £500 while everyone else will get £250. These are the first contributions that these children will have received from the Government since equivalent amounts were paid in when the account were opened, at which point thirty per cent qualified for the more generous award. The money is invested and, under normal circumstances, is locked away until the child reaches age 18.

The need, in the medium-term, to reduce public borrowing makes it natural to try to identify the areas of public spending that could be cut with the least pain. Might the Child Trust Fund be a potential candidate? Each year around 800,000 newborns receive an account at a cost - including the top-ups at age seven - of around £½ billion to the taxpayer. Abolishing it would make a small, but not insignificant, contribution to the total £26 billion spending cut estimated to be needed by 2013-14 under the Government's spending plans.

There are two benefits from the Child Trust Fund. First, most eighteen year olds will have no financial assets so even a modest amount - such as £500 - can have a major impact on the distribution of wealth at that age. For those individuals unable to access credit it could increase opportunities, such as to continue in education, to purchase a car, to become self-employed or to go travelling. Second, children could benefit from seeing their Child Trust Fund accruing over time and learning about the advantages - and costs - of investing in riskier and safer financial products. The FTSE-100 index is currently around the level it was at the start of 2005 when the first Child Trust Fund vouchers were issued having first risen steadily, then fallen sharply and then risen again during the intervening period. Proponents of the policy therefore argue that the Child Trust Fund complements existing spending on schools and cash transfers to families with children, and that it could help improve life chances by bringing about a stronger saving culture.

Abolishing the Child Trust Fund would make newborns worse off in eighteen years time. But spending cuts in other areas might leave them worse off. Cuts to benefits or tax credits would reduce the amount that their parents have available to spend on them during their childhood. Cutting spending on public-services - such as pre-school education - could reduce the quality and quantity of the services provided. Both could reduce the quality of life and the future life chances of children by more than the abolition of the Child Trust Fund. The now increased focus on personal financial education within schools might be a more cost-effective way of helping children to make appropriate saving decisions in the future. When the time for tough choices about public spending arrives abolishing the Child Trust Fund could be one of the less unattractive options.