This is the fifth in a series of essays from the Rt Hon Kit Malthouse MP on how to fix the British economy. You can read the other instalments in the series here:
- Growth is the Child of Capital
- Ownership and Nationhood: The Fight for Economic Belonging
- We need a competition revolution – here’s how we do it
- Unaccountable institutions have led our economy astray
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A Family Big Bang: Putting Children at the Heart of Growth
There are only four ways to grow an economy. You can invent more stuff. You can produce stuff more efficiently. You can sell more stuff you make, grow or find in the ground, to the rest of the world. Or you can grow your population. A sensible government would be working to do all four at once. Britain, unfortunately, is struggling with three and ignoring the fourth entirely.
We have a birthrate crisis on our hands, and a tax and welfare system that makes it worse. The UK’s fertility rate has fallen to 1.49 children per woman – the lowest on record since before the Second World War. In some parts of the country, the decline is even steeper. Just this weekend, The Times reported that in Bristol, the fertility rate has dropped to just 1.14.
The consequences are already visible in the city. St Barnabas Primary School in the Montpelier neighbourhood recently closed its doors due to a lack of pupils. But it’s not just Bristol; across London, school rolls are falling fast, particularly in boroughs like Camden, Islington and Hackney. Primary schools once full to bursting are now half-empty, with some councils planning closures or mergers in response. And last week, it was reported that the Royal Free Hospital in London will be closing its maternity ward due to declining birth numbers. Local authorities and NHS trusts alike are starting to acknowledge what demographers have warned for years: the infrastructure of childhood is shrinking, creating a doom loop of population decline.
Every week brings a similar report. Maternity wards are consolidating. Health visitor numbers are falling. Nurseries are closing. We are designing a society for fewer and fewer children and then acting surprised when fewer and fewer arrive.
Meanwhile, our population pyramid is gradually inverting. In 1961, there were 4.1 working-age people for every pensioner. Today, that figure is 3.6. By 2070, it will be just 2.5. One estimate suggests we’ll need to raise the pension age to 71 by 2050 just to keep the system afloat.
And yet when I was at the Department for Education and raised the idea of a more avowedly natalist approach to policy, the reaction from advisers was swift and horrified. ‘You can’t say that!’ I was told. ‘It sounds eugenicist! It won’t play well.’
This is the problem. To disavow this alleged cynicism, we treat children as a lifestyle choice and parents as a cost centre. We design family policy as if we’re trying to contain a problem. Child Benefit is means-tested. Universal Credit penalises second earners. The two-child limit openly discourages larger families.
And childcare costs in the UK are some of the highest in the developed world – 29% of a couple’s average earnings for two children in full-time care. In France, it’s 14%. In Germany, it’s 1%.
What childcare system we do have is a Heath Robinson maze of overlapping subsidies, tax-free schemes and partial entitlements. It is opaque, hard to navigate and often poorly understood by those it is meant to help. We take tax off working parents, pay ourselves a hefty admin charge to process a dozen different eligibility routes and then give some of it back in the form of fragmented childcare support. It is inefficient, bureaucratic and fundamentally misses the point. Why not just leave more of that money with parents in the first place?
In fact, it’s the tax system that really reveals how backwards we’ve got this. Families with children actually pay more tax than similarly situated households without them. A study by the Taxation of Families in Europe project found that UK families face one of the highest tax burdens relative to childless couples anywhere in the OECD. The system barely acknowledges that children exist, let alone that they are the future tax base we all depend on.
The financial pressures are staggering. Research published recently in The Times found that raising two children until the age of 18, including housing costs, now means families must find an additional £509,314 compared to remaining childless. For many young people, the choice is now stark: have children or own a home – but not both.
This growing tension is reflected in the sharp fall in household formation rates across the UK. The number of new households being formed has slowed dramatically over the past decade, despite rising population levels. Young adults are delaying or forgoing setting up their own homes entirely. Household formation is a key driver of demand in the economy – from furniture and appliances to utilities and housing itself. When household formation slows, so does growth. More importantly, it signals a social breakdown: a generation unable to afford the basics of adulthood, much less parenthood.
The reasons are not mysterious. High rents, unaffordable house prices, stagnant wages and punishing childcare costs all feed into a cycle where forming a household is economically irrational for too many. A nation of stalled starts and deferred plans does not build prosperity. It builds frustration and decline.
We used to do better. Until the early 1990s, the UK effectively had a Family Tax Allowance, which recognised children through the tax code. It wasn’t perfect, but it acknowledged two basic truths: raising children costs money, and society benefits from it. Then came the shift to separate taxation for husbands and wives – heralded at the time as a step forward for female emancipation. And in many ways, it was. But in the rush to treat adults as individuals, we forgot about children. We stripped out the recognition that some adults are also parents. We erased the economic reality of dependency from the tax code.
Other countries still operate on a better principle. France’s family quotient system allows households to split income between parents and children. Hungary exempts mothers of three or more from income tax altogether. Poland offers child bonuses and generous family benefits. Japan is now experimenting with mortgage subsidies and tax cuts for families. These are not fringe ideas. They are pragmatic, pro-growth policies grounded in demographic reality. And they are popular. In Hungary, family policy reforms have become a central electoral message for Fidesz. In France, cross-party consensus has preserved family taxation for decades. Voters respond to policies that make raising children more viable. They reward governments that treat kids as part of the solution.
The Conservative Party, at its best, has always understood that family is not just a social value but an economic engine. Somewhere along the line, we got embarrassed about saying so. We developed a kind of cultural cringe around supporting families, worried it might imply a judgement about lifestyle or family structure. But this is the 21st century. Supporting children isn’t about prescribing how people live. It’s about making sure every child, regardless of their parents’ arrangement, is recognised and supported as a contributor to our shared future.
While economic policy debates are often dry, and the public doesn’t spend time parsing the philosophical nuances of Keynes versus Friedman, every manifesto needs something simple, direct and popular. As I have laid out in my previous essays, the Conservative Party urgently needs a defining set of economic policies to sit at the heart of its future offer, but above all it needs something that speaks directly to working families, reflects our values, and addresses a clear long-term challenge.
This is that policy: I propose a fully transferable Children’s Tax Allowance of £15,000 per child, per year. Applied in the same way as the personal allowance, this would mean a couple with two children could earn £55,140 tax-free (£12,570 x2 for each parent, plus £15,000 x2 for their children). This isn’t a handout. It’s not welfare. It’s a structural rebalancing of the tax system that recognises the contribution of families. Something parents and grandparents alike can grasp immediately. A policy that says: ‘we see what you’re doing, and we value it.’
The allowance could be paid for, in full or in part, by winding down the existing labyrinth of childcare subsidies and schemes for all but the most vulnerable. The current system is expensive, complex and inefficient. Redirecting those funds into a clean, universal tax allowance would be more transparent, fair and empowering for families. It would simplify government, reduce bureaucracy and send a clear message: we trust parents to make the best choices for their children.
Crucially, it also supports work. Unlike means-tested benefits, which taper off and penalise increased earnings, a tax allowance encourages people to work and keep more of what they earn. And it supports choice. It doesn’t force families into one model or another. It simply gives them more room to decide what works for them.
Then there’s the two-child limit. The original rationale was not entirely without merit. The idea was that those on welfare should face similar choices and incentives as those in work – that the system should not encourage family sizes that working households could not afford. But politics is about priorities. And now, as we confront a birthrate collapse and shrinking cohorts of children across the country, we must ask whether this policy is still fit for purpose. Are we prepared to keep discouraging the very families who might want a third child at a time when the country desperately needs more children? The cost of keeping the two-child cap may soon outweigh the political comfort it offers. It’s time to think again.
We should also be honest: these policies aren’t just about children. They’re about women’s economic advancement. The UK has one of the highest penalties in Europe for mothers returning to the workforce. There’s much talk about getting more women into senior roles, but we design a system that makes it harder to climb back in after having children. Sky-high childcare costs often make it financially illogical for women to return to work. Family tax allowances won’t solve this on their own, but they will help. They will make returning to work more financially viable, offering women more flexibility and fewer trade-offs.
The public already gets it. Polling shows overwhelming support for stronger family tax relief. Voters understand that the cost of raising children has risen dramatically, while the support for it has lagged behind. They understand that this is about fairness and common sense.
If we are to return to power, the Conservative Party needs a flagship family policy that treats children not as a burden, but as a benefit. We need to stop managing decline and start planning for growth. A Children’s Tax Allowance is not just good economics; it’s a moral statement about what kind of country we want to be.
It’s time to bring children back to the centre of our economic model. Because with them comes renewal, with them comes purpose – and without them, we face inevitable decline.
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