Today’s childcare announcements have been framed as essential to making it worthwhile for parents to move into work. Nick Clegg says that “many mums and dads simply can’t afford to work”. For parents in the lower half of the income distribution, it’s true that the cost of childcare makes a huge dent in the financial benefit working. So the decision to raise support for working parents on Universal Credit ‘equivalent to 85% of costs’ seems like a smart move.
But what’s surprising is the cost of the Universal Credit measure. The £200m price tag is to be met from somewhere unspecified within the social security budget. That sounds like deferred pain. But it is nevertheless suspiciously cheap.
Back at the 2010 Spending Review, the Chancellor decided to save around £400m per year (by 2015) by cutting the proportion of childcare costs covered for working families on tax credits from 80% to 70%. That would lead us to anticipate that this reversal to 85% would cost half as much more than the 2010 cut saved, or around £600m per year. Indeed, with the extension of support to short-hours workers, one might expect 85% coverage to cost even more.
So what is making up the difference between the £200m price tag and the £600m this measure should be costing? A line in the press release gives away the answer: the extra £200m will only go to families where all adults are taxpayers. So, because of the Coalition’s plan to have a £10k tax-free allowance by 2015, only couples on at least £20,000 – and in most cases more – will be eligible for the new support. Since around half of all lone parent claimants of the childcare element work short hours, only those on the highest hourly pay rates will be eligible for the new support.
This is a strange sort of reverse means-test, in which the working poor won’t be eligible. That’s an odd choice if the aim is to encourage those with the weakest work incentives to move back into employment. It will also doubtless be hellish to administer (along with the administrative headaches of the other new scheme announced today for better-off parents), which is probably why the Treasury’s statement is unclear about how the scheme will actually work. What is clear is that the benefits system just got a whole lot more complicated.