The government says it wants to make childcare more affordable for working parents. Tackling supply-side issues is the only effective way to do it
The government appears to be chasing its tail on childcare. Ahead of the coalition’s mid-term review, leaked proposals suggested that the government would announce the introduction of a childcare tax allowance to help parents with their costs.
There was speculation that there would be a flat rate allowance of £2,000 and other measures, including adjustments to children/nursery staff ratios. An announcement on the tax allowance has since been delayed, as a result of disagreement over where funding for the tax allowance will come from, and there are reports that rather than being universal it might be targeted. So why is reform in this area proving such a challenge?
Childcare in the UK is expensive for both the government and parents. The OECD has shown that parents here spend around 27 per cent of their income on childcare costs, compared to an OECD average of 12 per cent. And surveys repeatedly report that women are put off from going back to work because of a lack of affordable childcare. How to solve this challenge is top of the agenda for both the coalition government and the Opposition.
In the past, governments have made efforts to make childcare more affordable for parents through increasing state spending. In the current climate, further increasing this source of funds is simply not an option. But more importantly, higher spending has not led to improvements and there is evidence to suggest that past increases in spending have done little more than lead to cost-price inflation. The idea that spending more can remedy the problem doesn’t add up.
In addition, a complex system of funding has developed. Some provision comes from the Early Years Entitlement, which allows 3 and 4 year olds to receive 15 hours of free early education a week (to be extended to 2 year olds from low-income families in 2013 and 2014). Other funding comes from the tax credit and benefit system, particularly the childcare element of the Working Tax Credit, which allows parents to claim up to 70 per cent of childcare costs subject to a weekly limit.
A childcare vouchers scheme is also offered by some employers to help parents with costs, in the form of childcare vouchers that are exempt from income tax and national insurance contributions.
The solution must be to consider why childcare is so expensive in the first place as only then can costs be brought down. The government is right to look at the supply side – and in particular the regulation surrounding childcare. This includes proposals to increase the number of children nursery staff and childminders are able to look after at any one time.
As reported by the Department for Education, staff costs account for 77 per cent of nurseries’ total costs. Notably, this is as a result of contact time with children rather than administrative burdens. If more value for money can be achieved in childcare provision, this would help to drive down costs for both the government and parents.
Kimberley Trewhitt is a senior researcher at the Reform think-tank
