A hat-trick of childcare policies are being rolled out this Autumn. But is the current approach an expensive own goal?

Published on Tax and Welfare

Childcare support is all the rage. As well as being the focus of one of the key policy announcements at Labour Conference this week, the government is rolling out not one but three new policies this Autumn. Even in these austere times, the government is spending £2bn on the introduction of Tax Free Childcare and an extra 15 free hours for working parents of 3 and 4 year olds. And as the rollout of Universal Credit (UC) is ramped up, many more low income families will find that 85 per cent of their costs will be covered by their new UC award.

So far so ambitious. And a sign of the importance recognised by all parties of providing affordable childcare. But it is important to ask whether the current approach of extending several overlapping childcare schemes is resulting in support being targeted where it is most needed, and where it leaves work incentives for many parents. These schemes have gradually evolved since the late-1990s, when very little assistance existed at all. But ad hoc boosts to these policies is placing pressure on a now creaking system. So where are the crunch points, and how can it be fixed?

First there is the question of who are the main beneficiaries of this approach. Around three-quarters of the additional spend on extending free hours to three and four year olds this Autumn will go to the richest half of households. In part this is an inevitable outcome when focusing support on working households, especially dual earners.

Furthermore, lower income families on tax credits or Universal Credit (UC) can’t get further support from the new Tax Free Childcare policy at all. In practice families on these benefits also won’t get much benefit from the 30 free hours either as they already have at least 70 per cent of their costs covered through the childcare element of Working Tax Credit (rising to 85 per cent under UC).

A working family on the minimum wage in receipt of tax credits could gain by only £15 a week from the extra 15 free hours. That could fall to as little as £5 if they also claim Housing Benefit – an increasingly likely occurrence with more young families in the private rented sector. But why is this an issue if lower earners already receive so much support?

That takes us to the second issue – work incentives. Childcare is expensive regardless of your earnings, but what you end up taking home matters. Taking the average cost of childcare at £4.65 an hour, our analysis shows that a worker on the National Living Wage entitled to tax credits will be only 63p better off for an additional hour they work. Contrast that to a median earner with Tax Free Childcare – they would be £4.55 better off an hour. These big differences affect people’s work incentives. For many low-income families with pre-school age children there is very little incentive to progress at work.

Those low gains from working more hours could mean many try to find hours of work that simply match free provision. That equates to around 25 hours a week if you factor in travel time. If parents of young children find themselves trapped in poorly paid part-time work it can have a lasting negative impact on their chances of earning more over the rest of their life.

The additional free hours also looks set to do more to reduce costs for existing working parents rather than encouraging more parents into work. The original 15 hours of free childcare, while an important step to boost childcare provision with astonishingly high near universal take-up, actually did relatively little to boost labour supply, it tended instead to simply reduce costs for parents already using childcare to work.

Allowing parents to start accessing regular and stable childcare whatever their work status (as we do at the point that children start school) is associated with more mums working. Providing more free hours to pre-school children on a similar basis might therefore prove to be more effective in terms of boosting employment if that is the key policy objective. However, this would cost more and there are questions about the extent to which work decisions are tied into cultural norms. Labour’s proposal for universally available childcare for 2-4 year olds may be an attempt to address this issue but the recent history of childcare policy reminds us we’ll need more detail on the delivery and funding of any new policy.

It is encouraging that both parties recognise the importance of childcare and are committed to putting new funding in place. But the problems that are already bubbling up – from the risk of undersupply of new free places, possible price rises to cover funding shortfalls – show that expanding on existing policy isn’t necessarily the best way to help parents and childcare providers.

New thinking is needed on childcare. The ultimate aim should be for a simplified childcare system with clear dual aims to support child development and parental employment, rather than another decade of a hotchpotch of opportunistic tweaks and expansions.