Argue with an Academic – Dr Rajiv Prabhakar on asset-based welfare

If you have a policy idea in reply to this piece, please submit it to by 12th February 2016. The best ideas will be published in the March edition of our journal, The Spectrum. 

Dr Rajiv Prabhakar is a lecturer in personal finance at the Open University and University College London. He is a world-renowned expert in asset-based welfare. 

Asset-based welfare (ABW) was one of the most innovative social policy agendas of the last Labour government. US academic Michel Sherraden first coined the term ABW to refer to the idea that the individual ownership of assets is important for individual welfare. Sherraden (1991) argues that traditional social policy towards the poor has relied on raising income through the tax and benefit system. He claims that while this type of policy addresses the symptoms of poverty, it does not tackle its underlying causes. He claims that owning a stock of assets is different because this leads to changes in how people think or behave in the world. This ‘asset-effect’ is important because people then take the steps to avoid welfare problems arising in the first place. For example, having a personal pension prompts people to save more to avoid poverty in retirement. 

The asset-effect is controversial. There is no agreement in the empirical literature about whether or not such an effect exists (Prabhakar 2008; Gregory 2014). Despite this controversy, ABW had an impact on policy. This was probably most advanced under New Labour. New Labour introduced the Child Trust Fund (CTF), which was influenced heavily by Sherraden’s ideas. Under the CTF, all babies born in the UK from September 2002 were given a £250 grant from government. These grants were locked into special 18 year old accounts. Children from poorer backgrounds qualified for an extra £250 and so received £500. This was described as progressive universalism. The CTF was universal because all children received a grant and progressive because poorer children received a larger initial endowment. Family and friends could save up to £1,200 a year into this account (HM Treasury 2001). New Labour had planned to add to the CTF by introducing a Saving Gateway (SG) in 2010. These were to be special 2 savings account aimed at those on low incomes. Every £1 saved by a SG account holder would attract a 50p match from government (the total government match would be capped at £300) (Edmonds 2009).

The CTF was the first policy of its kind anywhere in the world and attracted international interest. A survey of UK academics described the CTF as one of the most successful policies from UK government over the past 30 years (Norris and McCrae 2013). However, the success of the CTF was short-lived. In 2010, the Conservative-Liberal Democrat government stopped government payments into the CTF (though there was an exception for children in local authority care) and cancelled the proposed roll-out of the SG in its first wave of public spending cuts. The ABW has also attracted a growing number of critics who are worried that it diverted resources from more pressing areas of spending and that it helped prompt the financial crisis (Prabhakar 2008; Gregory 2014).

A basic capital approach

So what now for ABW? The asset-effect approach is not the only rationale for ABW. There is also an alternative approach that emphasises the importance of providing assets as a way of reducing wealth inequality. Wealth inequality has attracted growing comment and concern, as can be seen in public debates about the 1% of the wealthiest in society versus the 99% of the rest of society (Piketty 2014; Atkinson 2015). Although wealth inequality might be justified on some grounds (such as the incentive it might give for economic innovation), there are concerns that current wealth inequality destroys economic efficiency and is morally unjustified. Taxing wealth is an obvious way of reducing wealth inequality. However, spreading wealth is another way of trying to reduce wealth. ‘Basic capital’ is that idea that everyone should be given a capital grant as a mark of citizenship. If wealth taxes are used to pay for capital grants, then this could mean a two pronged attack on wealth inequality.

Thomas Paine outlined a forerunner to the basic capital idea during the eighteenth century. In Agrarian Justice he argued that a tax on natural resources should be used to provide capital grants for all young people (Paine 1987). There have also been modern versions of this idea. Julian Le Grand and David Nissan (2000) proposed that all 18 year olds should receive a £10,000 grant from government. In the US, Bruce Ackerman and Anne Alstott (1999) went even further and argued that all 21 year olds should receive an $80,000 stake. Differences exist in this basic capital literature about whether or not any restrictions should be placed on how such grants should be used.

More recently, A.B. Atkinson (2015) draws on basic capital ideas when he calls for a reborn CTF to reduce wealth inequality. Atkinson (2015) has a long-standing interest in tackling wealth inequality and a basic capital is one of his 15 proposals he makes for the creation of a more equal society. Although the details of his proposal remain to be worked out, Atkinson (2015) says that his plan is aimed at fulfilling Paine’s dream of an inheritance for all. The grant would be paid at adulthood. He proposes the introduction of a lifetime capital receipts tax (that taxes the gifts or inheritances that a person receives over their life) as a way of paying for grants for all. He says that revenue from current inheritance tax receipts in the UK would pay for a grant of around £5,000 for everybody. This plan would therefore place the CTF on a different path from the one that was developing under New Labour, and perhaps towards a more equal realm.

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