iCloud is basically storage out there somewhere on the internet. So you've got some space that's available for you to use to store photos, apps and music.
However the first problem is that you don't get much space. 5gb is free (so smaller than than Touch) but you can buy more starting from an extra 10gb for £14 a year (stop paying and the space goes away). On the plus side things you buy from iTunes (e.g. music and Apps) don't take up any of that space and are stored there for you.
However the kicker seems to be that the iPod will still want to download things from the Cloud to access them, and downloading will take up space. So if the iPod is full and you want to play Angry Birds which you bought before then you'll need to delete some things to make room. And this is nothing that you can't do right now with a PC. iCloud makes it easier as you don't need to plug in to do it, but it's the same juggle that those of us with small devices have always had to do.
So it's not as if the cloud is some magic space that will just make anything you've every bought seamlessly available.
And of course all of this will only work when your child is at home and has a WIFI connection. Once you've downloaded something from iCloud onto the iPod you've got it but if you're out and about you're "stuck" with what's on it.
Is 8gb enough? Well I've got about 1500 high quality songs and 14 apps on my 16gb iPod Touch. But it will vary enormously depending on what you want to put on it, for example video will really chew up the space. Even Apple seem to have stopped giving guidelines for how much you can fit on each iPod, it's just so variable as to be hard to judge.