Wake-up call on childcare

Published on Tax and Welfare

Speaking at the Liberal Democrat’s Spring Conference, Nick Clegg once again took up the cause of hard working families in Britain – his ‘alarm clock Britain’, the people who want to get up and get on.

But changes to the childcare tax credit announced in the Comprehensive Spending Review and due to come in this April will leave these very families worse off. This at time when families are already struggling to cope with the high costs of food and fuel and wage freezes.

Half a million families earning £30,000 or less a year claim the childcare element of the working tax credit to help them pay for childcare. At present, it covers 80% of the costs of childcare up to £175 a week for one child and £300 a week for two or more children. From 6 April, the government will only cover 70% of childcare costs. This will mean a loss of £436 a year on average, with some parents losing up to £1,300.

For working parents on modest pay, a loss of this size could mean that work no longer pays. According to the Daycare Trust, the average cost of childcare in England is £4,790 a year for 25 hours a week, with parents having to pay over £5,000 for a nursery place for a child under two and over £6,000 in London and the South East. Without support, the costs of childcare would eat up a large chunk of a part-time salary for a low earner on top of the other costs of going to work such as transportation and clothing.

Until the change to the childcare tax credit comes into force in a couple of weeks, we won’t know exactly how parents will respond. The government’s assumption is that no one will change their behaviour and, therefore, the cut to childcare funding will save £270m in the coming financial year. That’s a strange position to hold; why subsidise childcare from the public purse if you think it has no impact on parents’ working patterns? In any case, when it comes to other policies like the personal allowance – worth £200 – the government is comfortable claiming it’s increasing work incentives. They can’t have it both ways.

In any case, we now know that the government position is likely to be wrong. A Resolution Foundation survey of over 2,000 working mothers conducted in partnership with Netmums indicates that the government’s assumption is fanciful. Of the mothers surveyed, more than two thirds were intending to change either their working hours or their childcare arrangements in response to the reduction in the childcare tax credit. More than one in five said that they would stop work altogether and more than a quarter said that they would reduce their working hours.

In reality, the changes in working patterns may be less dramatic than the survey results suggest. But there is a real possibility that the savings the government hoped to make through the cut in the childcare tax credit will be largely unravelled by women working fewer hours than before. While this will save spending on support for childcare, it will also reduce tax revenue, with the possibility that the change in the childcare tax credit may cost families a lot in terms of reduced household incomes and save the government very little.

Female employment has been important in raising the living standards of low-to-middle earning households over the last 20 years. As real wages began to stagnate in 2003, having two people going out to work has been one way for families to keep up their living standards. But current reforms seem to be making it harder, not easier, for second earners to stay in work. The forthcoming change in the childcare tax credit comes on the back of the Welfare Reform bill which, based on current analysis, also appears to disadvantage second earners with children.

This is bad for working women, bad for employment and bad for the economy as a whole. If the Deputy Prime Minister wants to show his commitment to working families beyond the conference halls of Sheffield, he should push the Chancellor to reverse the childcare tax credit change in next week’s budget.

The findings of our survey of over 2000 working mums can be downloaded here.

This blog first appeared on Public Finance.