The SMF’s childcare plan: debunking the myths

Ian Mulheirn examines some of the common misconceptions of the SMF’s proposed scheme to offer income contingent loans for childcare.

1. With personal debt at an all-time high, how can the SMF justify a scheme which plunges parents into yet more debt?

Some of the hyperbole about parents ‘drowning in debt’ is sadly ill-informed for four reasons.

First, the debt dodgers fail to distinguish this proposal from common-or-garden commercial debts. If you don’t pay back a bank loan or keep up your mortgage repayments, bad things happen. People are right to worry about that kind of debt – what if you lose your job and simply can’t pay? But these fears don’t apply on an income-contingent loan: if you don’t earn, you don’t pay and eventually the debt is written off. So the scheme is more like a capped tax system – and do you lie awake worrying about how much income tax you’ll have to pay next year? I thought not.

Second, for most parents who currently use childcare, they already face the outlay of childcare expenditure. Student loans were controversial because the government tripled the fees that loans are used for. But in this case, government isn’t doing anything to raise the costs of childcare. So for most families this is about easing an existing burden – not adding a new one.

If all that wasn’t enough, funding childcare through the SMF scheme isn’t like hire purchase on a flat screen TV, or taking a bank loan to have a punt on Bernie Madoff’s Ponzi scheme. Rather it’s an investment in improving children’s educational outcomes and boosting parents’ earnings. Why should it only be rich families with plenty of cash who can invest in their and their children’s futures?

Finally, this is an entirely voluntary scheme, so if parents don’t want to use it they don’t have to, but if the state can help, it should. Nobody will be drowned in anything except perhaps specious comment from the debt fundamentalists.

2. Your scheme proposes up to £10,000 per family. Won’t that just result in a massive extra bill to the taxpayer because parents won’t repay?

Our modelling suggests that somewhere around nine out of ten scheme users will repay the support they draw down in full. Many of the rest will repay a large proportion of the cash. To protect taxpayers, that shortfall – small though it is – has to be paid for by scheme users. That’s why we’ve proposed that the interest rate parents will pay to use the scheme should be 0.8% above the government’s cost of borrowing, which should be sufficient to mop up any underpayments from the lowest earners.

3. This scheme is all about pushing parents into sending their kids to formal childcare. Are you saying that parents aren’t able to look after their kids properly?

This scheme is voluntary and we’re not suggesting that government should be prescriptive about how parents should arrange care for their children. The NCCS is designed to be an enabling policy so that those parents who want to work but feel they can’t afford to can do so. Nevertheless, it’s worth noting that the evidence does suggest that child outcomes from high-quality childcare are very positive.

4. If you have to be in work to access the scheme, doesn’t it discriminate against families on low incomes who are not eligible?

A key justification for the NCSS is that evidence suggests that mothers’ wages rise much more quickly if their absence from employment is brief than if they spend a number of years away from work. So the family’s borrowing is justified in part on higher future wages, as with students’ decisions to go to university. That’s not the same for parents who don’t work, and the lower likelihood that the support given to these parents would be paid back would mean greater costs for either the taxpayer or other scheme users. For that reason, the programme is designed to help make work pay.

5. Some people say that £10,000 isn’t nearly enough to cover many parents’ childcare costs, particularly those living in London

Average childcare costs among tax credits claimants is a little over £90 per week. For those in the bottom half of the income distribution, 70% of these costs are covered by the tax credits system. Employer-supported childcare vouchers are also available for higher earners. The NCCS is proposed as a top-up to existing forms of support and should therefore cover the requirements of most, if not all, parents. Polling for our report showed that the majority of parents interested in the scheme would want help of less than £200 per month, or £2,400 per year.

6. Won’t this scheme simply make childcare costs go higher and higher?

Increased demand for childcare would improve the quality and flexibility of existing provision, and greater economies of scale could in fact put downward pressure on prices. Only in areas where childcare provision is so patchy that providers have monopoly power might better funding lead to pressure on prices.

7. Shouldn’t we be tackling the root cause of rising childcare costs instead of giving people access to more money to cover them?

There are many views on why childcare costs are high in comparison to other countries. The high cost of premises, regulations on the sector and the drive for higher staff quality are often cited. There may be a case for looking at tackling some of these cost drivers. But there is likely to be a trade-off between cost and quality of provision – highly-trained professional staff cost more but may be well worth investing in. There is a debate to be had on costs but prices are unlikely fall precipitously in the near future, and helping parents with their costs will remain an central part of affordable childcare.


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