Iain Duncan Smith has found an extra £300m for childcare in his Universal Credit, but women who want to work longer hours will lose out. The result is only going to make households worse off
Earlier this month, the government announced the level of support that would be available for childcare under Universal Credit when it is introduced in 2013. This is equivalent to the support currently available to low-to-middle income families through the childcare element of the Working Tax Credit.
With polls indicating that the government is losing favour with working women, Work & Pensions Secretary Ian Duncan Smith managed to twist a few arms and win an additional £300m for childcare. What this extra funding means is that the government is able to offer families the same deal under Universal Credit as it does today: 70% of childcare costs up to a ceiling of £175 for one child or £300 for two or more children.
But keeping things the same doesn’t mean that there wont be winners and losers. Analysis by Donald Hirsch published earlier this week by the Resolution Foundation and Gingerbread, the single parents’ organisation, shows who wins and who loses from the change compared to the pre-April 2011 tax credit system.
The winners under Universal Credit will be those parents who currently work fewer than 16 hours a week. Under the pre-April 2011 system, a parent earning the minimum wage who increases their hours from eight to 12 hours a week ends up about £14 worse off by working more. In large part, this is because parents working fewer than 16 hours cannot get support for childcare under the tax credit system.
Under Universal Credit, the same parent ends up marginally better off by working additional hours, although she still only keeps about £4 of the extra money she earns.
Eradicating worklessness by creating incentives for people who are unemployed to give work a try has been one of Duncan Smith’s overriding objectives in introducing Universal Credit. This was part of his rationale for extending childcare support to those working only a few hours.
If the winners are those working a few hours, then the losers from Universal Credit will be single parents and second earners who work longer hours and want to work more. For example, a second earner who took a job for 16 hours a week under the pre-April 2011 system would be around £46 better off from working an extra four hours. Under Universal Credit, the same parent would only be £17 better off, less than a third of what they would get under the previous system.
If it doesn’t pay for women to work longer hours, household incomes will be hard hit. According to the IFS, over the last 40 years women’s earnings have accounted for around a quarter of the growth in incomes among low-to-middle income households. Men’s earnings, on the other hand, have accounted for only 10% of the growth.
Women’s work has become an increasingly important contributor to propping up living standards. Capping the ambitions of working women through the introduction of Universal Credit will only leave households worse off.
Understandably, the childcare sector claimed a minor victory following the government’s childcare announcement. The situation for families was not made much worse, as many had feared. But despite an additional £300m for childcare, affordability remains a major challenge for many working families.
The problem is particularly acute in major cities such as London where fewer people have an extended family who can provide free, informal care, particularly when formal childcare is not available.
In the past, we have tended to look to government to grow the childcare market through greater investment. But that approach is out of step with today’s economic environment. Instead, we need to look to more innovative approaches that view childcare as a critical part of the infrastructure needed to support local regeneration, employment and growth.
Viewed in this way, the government’s proposal to allow councils to keep a portion of their business rates to reinvest locally should focus on childcare as a priority.
Vidhya Alakeson is director of research and strategy at the Resolution Foundation
