Media Release

Childcare: the good, the bad, the uncertain

The Government’s new childcare voucher scheme is welcome news for many middle- and high-income parents with children under the age of five struggling with the high costs of childcare: polling by YouGov for the SMF that just as many these parents said they found it difficult to pay for childcare as parents on the lowest incomes.

The new scheme could be more generous for the majority of claimants than the current employer-supported voucher scheme, which will be phased out: it provides up to £1,200 a year per child whereas the existing scheme enabled basic-rate taxpayers to claim £887 a year per person.

Access to the new scheme will also be less arbitrary than the current system. At present, parents can only benefit if their employer offered the scheme: and fewer than 5% of employers do. Another improvement is that the financial support on offer to a family rises with each extra child whereas the existing scheme enables both parents to claim, meaning couples benefited above single parents with the same number of children.

So there are a number of improvements in the new scheme. But there are still a number of questions that need answering. Five big issues are:

1. Where is the money coming from to pay for it all?
The new voucher scheme costs £1.4bn a year. £600 million is coming from the existing voucher scheme. But this is only an estimate:  as businesses don’t have to report how many people are using the scheme, it’s not possible to quantify the exact costs. Also, it is unclear where the remaining £750 million is coming from. What’s more, the scheme will eventsually be extended to parents with children under the age of 12, which will require additional funding.

2. How many losers are there?
There are several groups of losers from this package. One-earner couple families will not be eligible for support, whereas they are under the current scheme. Ditto parents with children aged between 5 and 16. Also, how many couples benefiting twice from existing employer-supported vouchers will lose out from the new per child rule? Finally, the new voucher provides a maximum 20% of your overall costs. In the old scheme, basic rate taxpayers received 31% on £55 a week vouchers; so, as James Ball at The Guardian has noted, this existing scheme provides more support than the new voucher if your typical costs are low.How many people will fall into these different groups is unclear.

3. How fair is it?
Financial support is available to very high-income households. For example, two parents earning £140,000 each could benefit from this scheme. As Elizabeth Rigby from the FT has noted, the new scheme will see higher-rate taxpayers get the proportion of their costs covered as basic-rate taxpayers; under the current scheme, basic-rate taxpayers receive more. Is this a good use of public money? Indeed, many low-income parents saw a cut in their childcare support through the tax credit system from 80 to 70% of their weekly costs in April 2011. As Ian explained in an earlier blog, many households on Universal Credit will not benefit from the proposed uprating of the childcare element of the Universal Credit to 85%. Is it right to offer very high-income households more as households on the very lowest incomes saw their childcare cut?

4. Will it inflate costs?
Several commentators, including Nick Pearce at the IPPR, have raised concerns that this could inflate prices, as in the long-term middle- and high-income parents will carry on being willing to pay for the same shortfall between the ticket price and their subsidy. As we explained in A Better Beginning, in a mature market where parents have real choice, this shouldn’t be the case. And this subsidy should strengthen demand. But we are not sure how mature the market is and how it will react to this subsidy. At least with our proposed loans scheme, parents would be ultimately using their own – rather than government – money, and this could control prices.

5. What will the administrative costs be?
Means-testing typically causes complexity, making the administration of such a scheme expensive, as well as vulnerable to costly fraud and error. The cut off for parents at £150,000 for the vouchers, as well as the eligibility of the new UC support for those above the personal allowance, could be hellish to administer. Ironically, the Government has designed an almost universal scheme with the administrative complexity of means-testing.

There’s much to welcome about this new package, not least that it will have a much wider reach than the current voucher scheme. But its remains to be seen whether this will be an effective solution for helping a majority of parents better afford the high cost of childcare.


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