Perrottet's child trust fund policy dusts off an idea last tried by UK Labour

The “Kids Future Fund” promised by NSW’s Premier Dominic Perrottet if his government is re-elected on March 25 is an idea discussed by social policy experts since the 1990s but rarely embraced by politicians.

Britain’s Blair Labour government introduced a similar policy in the early 2000s but it lasted just eight years before being scrapped as part of budget cutbacks.

Perrottet’s promise is to put $400 into a trust fund for every child aged up to 10 years old (and then for every child born). The government will then match contributions made by the child’s parents (or grandparents) up to $400 a year until the child turns 18.

The trust account can only be accessed after age 18, for two purposes only: to help buy a home; or for education, including tuition fees, learning materials, computers and tools needed to get a qualification.

The estimated cost to the NSW budget over the next four years will be A$850 million.

The Perottet government says this could mean every child born in NSW from this year could have, at age 18, a trust fund worth about $28,500. But this depends on co-contributions and a generous rate of interest. It assumes a 7% return, though the announced policy is that the state government will guarantee a 4% return.

The government’s direct contributions will be:

• $200 a year to any family receiving Family Tax Benefit A (normally available to families with one child earning up to $108,892 a year, or more for larger families)

• up to $200 more to recipients of Family Tax Benefit A, if matched by the parents (or grandparents)

• up to $400 a year for everyone else, if matched.

Parents will be allowed to contribute up to $1,000 a year (presumably to take advantage of the interest rates). Contributions can be made after age 18, but won’t be matched.

Those who only get $200 a year will, using the same formula as the government, have a fund worth a little more than $7,000.

Read more: Other Australians don't earn what you think. $59,538, is typical

Origins of asset-based social policy

The idea of “trust funds” for children has become more popular since the 1990s, and is most associated with the work of US social researcher Michael Sherraden.

As the Encyclopedia of Social Work puts it, the idea is to build assets complementary to traditional social policy based on income.

“In fact, asset-based policy with large public subsidies already existed (and still exists) in the United States. But the policy is regressive, benefiting the rich far more than the poor. The goal should be a universal, progressive, and lifelong asset-based policy. One promising pathway may be child development accounts (CDAs) beginning at birth, with greater public deposits for the poorest children. If all children had an account, then eventually this could grow into a universal public policy across the life course.”

That this idea emerged in the US may reflect the fact wealth there is more unequally distributed than in most other OECD nations. The least wealthy 60% of Americans own just 3% of total wealth, compared with 17% in Australia.

Read more: Our top 1% of income earners is an increasingly entrenched elite

Britain’s Child Trust Fund

There have been a few experimental programs in Canada and the US. But the program most similar to the NSW government’s proposal is the UK’s Child Trust Fund, introduced by the Blair Labour government in 2003.

This provided every child born after August 2002 with an endowment at birth of £250 and an extra £250 for children in families with household income less than £14,495 (the threshold for receiving the full Child Tax Credit, the UK’s equivalent of the Family Tax Benefit).

In 2006 the UK government announced all eligible children would receive a further £250 at age seven, and those from lower-income families an extra £250 on top of that.

All returns were tax-free, including interest payments and capital gains. Parents could add up to £1,200. Except for a few emergency situations, funds could be withdrawn only after a child turned 18. There were no restrictions on use.

More than 6 million child trust funds were opened between 2003 and 2011, when the scheme was closed to new recipients by the government headed by David Cameron.

Recipients began to access funds in 2020. It remains unclear if the scheme benefited those it was meant to help. As many as 1 million accounts have been classed as “addressee gone away”. Those from poorer families are the most likely to be unaware they have a trust fund.

Issues and challenges

This highlights the greatest uncertainty about the benefits of the Perottet government’s proposal. How long will it last?

Another criticism is that the money could be better spent on families with children now rather than in the future. To be fair, however, the Perottet government is also promising measures including a full year of free preschool, five days a week, for every child.

But important details are lacking. For example, it appears the plan is to hold the money in some form of government-controlled account, with the funds “being invested”. With the UK scheme, accounts simply had to be with an approved financial institution. If the accounts are run by the NSW government, will they count as public assets?

The NSW scheme presumably will not involve tax-free status, since only the federal government has this power.

And even with the contribution paid to families receiving Family Tax Benefit, it is still clearly not as progressive as the UK scheme – where low-income families received deposits twice as much as higher-income families – or as beneficial as the original US proposals.