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Childcare: Cui bono?

The government’s announcement of new funding for childcare is a welcome step. Britain badly needs a better childcare system and any increases in funding for childcare are good news. Today’s announcement also tackles some of the unfairness of the current voucher scheme, by opening up tax relief to parents regardless of whether their employers offer vouchers, thereby widening fivefold the number of parents who are eligible for support. The extra £200 million for the childcare element of the universal credit also makes good some of the cuts that low-income families have faced in childcare help. But the plans also embody new forms of unfairness.

In future, families in which only one parent is working will not qualify for tax relief. There are 860,000 single-earner working-age families with children under the age of five, so the pool of losers is a large one (and that’s assuming that the self-employed qualify for the tax relief). Consider the example of a family with a two-year-old in nursery, with one parent at work and the other at home with an newborn infant. Under the current scheme, the couple could claim tax relief for the older child; under the new scheme, they won’t be able to do so.

The new tax relief scheme will also be broadly regressive, giving more to families on higher incomes than those lower down the income distribution – since tax reliefs always give more to those who pay more tax. It will leave the distribution of government funding for childcare with a U-shape: households on low incomes will qualify for tax credits and the better-off will qualify for tax reliefs, with less going to families in the middle.

More importantly, the government appears not to have learnt the lesson that paying for childcare through parental subsidies rather than funding nurseries and other providers directly pushes up costs, rather than bringing them down. Australia is a case in point.

It has enacted wide-reaching reforms to childcare over the last two decades, combining a mixture of deregulation and increases in childcare benefits, while at the same time effectively shutting off direct funding to childcare providers. Prices have risen sharply. In the 10 years before the 1997 reforms, the price of childcare rose on average by 5.2 per cent a year, around a fifth higher than the general rate of inflation. But in the decade after 1997, relative cost inflation rocketed, with childcare prices rising by 7.2 per cent annually, more than two and a half times the rate of wider inflation. In 2008, rather than reverse course, the Australian government doubled down on their inflationary approach, increasing the value of the tax rebate offered to families. If anything it appears that this has worsened childcare costs – in the year to March 2012 prices rose by almost 10 per cent.

You can see how this might happen in the UK. Let’s say that a family is currently paying £100 a week for a part-time place for a child under two. Under the government’s new system, parents pay £80 and the state tops it up with £20. But childcare inflation is running at 6 per cent a year: in two years’ time – when the new scheme comes in – the cost will be £112.50, of which the parent pays £90, the state £22.50. Already, half the gain to parents is wiped out. Then, two years after that, the average cost will be £125. At that point, the 20 per cent tax relief will mean that parents pay £100, the state £25 – parents are back to paying exactly the same as they are now (and it’s likely that their wages haven’t gone up in the meantime). For its part, the state is paying an extra £5 for all these families.

In fact, the rational response of childcare providers to the new system, many of whom are struggling with profitability as it is, would be to increase their prices even further and faster in response to this injection of subsidy from the state. In short, just two years after this tax relief scheme is introduced in 2015, parents could be left with the same childcare bills as they face now – but the state could be shelling out an extra £1.4 billion for it.

A far better way forward would be to expand funding for the supply side and cap charges to parents, as happens in the world’s best childcare systems, such as those in the Nordic countries (most funding for the under-fives in France, a country which childcare minister Liz Truss has extolled for its childcare, is paid directly to nursery schools).

One final issue that has been puzzling me these past few months is why the childcare voucher companies have not been gearing up their lobbying campaigns to oppose the scrapping of vouchers, as they did when I was in Number 10 and tried something similar. The answer is now clear: they will be the conduits for the new tax relief scheme and will greatly expand their markets. What remains unclear is how they will get paid.

Take the hypothetical family in the Treasury Q & A published today:

‘Example 1: Mr and Mrs Green pay £400 a month for John’s nursery school fees. They set up an account with a childcare voucher provider and each month they pay in £320, which the Government tops up with £80. They instruct the voucher provider to pay John’s nursery £400. Over the year, Mr and Mrs Green will save £960.’

In this example, the voucher company is providing a service free of charge. That’s not very likely, is it? What’s much more likely that they will take a percentage of the tax relief from the parent or from the provider. So that’s another chunk of today’s £1.4 billion gone.

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3 Responses to Childcare: Cui bono?

  1. Bradford Margolis says:

    “In fact, the rational response of childcare providers to the new system, many of whom are struggling with profitability as it is, would be to increase their prices even further and faster in response to this injection of subsidy from the state.” You like evidence until you require any to back up your assertions. And just saying it happened in Australia isn’t evidence.

    “In this example, the voucher company is providing a service free of charge. That’s not very likely, is it?” So what happens at the moment – since this is exactly what happens under the current system?!

    “Under the government’s new system, parents pay £80 and the state tops it up with £20. But childcare inflation is running at 6 per cent a year: in two years’ time – when the new scheme comes in – the cost will be £112.50, of which the parent pays £90, the state £22.50. Already, half the gain to parents is wiped out.” Umm, hang on – the gain is still 20% since in the absence of relief the individual would be paying £112.50 – unless you can prove that the policy would be the sole cause of the 6% inflation – which I doubt you could. There are several documented reasons why the price of childcare has gone up incl. child ratios, qualifications, rents, regulatory requirements / Ofsted obligations etc.

  2. Wise words! Totally agree. Wished the govt would face the childcare costs problem head on & deal with it properly.