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Why childcare spending makes economic sense

Government spending on childcare is essential to reduce child poverty and female unemployment. And it will help boost the economy too.

This week’s unemployment figures are likely to contain more bad news, as the gloomy economic outlook continues to take its effect on the British labour market. Last month’s data showed that the number of women looking for work now tops one million, the highest level since February 1988.

Women in the north of England have been particularly badly hit, with female unemployment increasing by 23 per cent in the north-east and by 19 per cent in Yorkshire over the last year. These job loses are causing real hardship for families, who are also facing rising prices and reductions in many tax credits and benefits. It’s also terrible for the public finances, meaning lower tax revenues and higher social security costs – forcing the chancellor to borrow billions more than planned in the years ahead.

Standing back slightly, the issue of female employment is of huge strategic importance to our country over the coming years. As a recent report from the Resolution Foundation makes clear, rising household income during the last two decades was driven to a significant extent by increasing numbers of women entering the labour market (off-setting the dramatic decline in male employment in the 1980s).

However, not long after the turn of the century female employment in Britain began to plateau, before falling quickly since the start of the Great Recession. The UK ranks 15thin the OCED in terms of female employment, largely explained by the big gap between the share of mothers working compared to women overall. This gap is much lower in the ‘best’ performing countries; in fact in Iceland and Sweden there are a greater proportion of mothers than women in employment.

These facts have two big implications for public policy. Firstly, increasing rates of female employment must be absolutely central to any attempt to raise household incomes and broaden the tax base over the coming years (an essential component of long-term fiscal sustainability). Secondly, countries that achieve such an outcome – Denmark, Sweden, the Netherlands – have high-quality, affordable childcare services and parental leave entitlements that enable mothers and fathers to combine work with bringing up their family.

Over the last 15 years, there has been progress on this front, though the current government is caught looking both ways: extending free part-time childcare for two-year-olds on the one hand, while reducing help with childcare costs through the tax credit system on the other.

To help shape where this debate goes next, the IPPR is publishing a new report examining the economic case for childcare, demonstrating that if it helps mothers to return to work, the upfront costs of extending provision would be more than covered by higher income tax and national insurance contributions. At a time of severe fiscal constraint, it is vital for Britain to focus public resources where they will make the most difference – in helping families with the cost of living and strengthening the public finances over the long term. Moving towards universal pre-school childcare would achieve both.

Pursuing this agenda is also crucial for any plausible strategy for reducing child poverty, given the fiscal context. Alan Milburn is right to be arguing today that the government should not be allowed to quietly drop the commitments it has signed up to on child poverty or allow progress to be reversed by stealth. He makes a powerful case for prioritising early-years services and the family incomes of those with young children under five – which chimes with the direction IPPR sets out in its report. The scale of the deficit means that all political parties have to face up to tough choices on spending – and set big strategic priorities for the country. Universal childcare should be top of that list.

First published on the Public Finance blog, 13/12/11

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