Tomorrow evening Progress is hosting a roundtable about on ‘Real choices for Labour: What would we give up to pay for universal childcare?’ Like every area of public spending, sorting out the provision of universally available, affordable childcare will have to stand up to the scrutiny of delivery within tight budgets. However, childcare is one area where the effects of widespread, low-cost provision through state intervention could pay for itself. Labour might not have to give anything up to pay for universal childcare – the impact on growth and the resultant higher tax take might make the benefits greater than the costs.
This is not a fanciful statement; this is exactly what was found in Quebec after it bought in a set of measures around parental leave, low-cost childcare and financial support for families. This suite of policies led to a significant increase in the supply of female labour (Lefebvre 2008), with the programme responsible for about 70,000 more mothers being in work. This increase in employed mothers has led to estimates of an increase of 1.7 per cent in GDP in Quebec (Fortin 2012). Once the costs of the programme and the projected tax revenues from additional economic activity are taken into account, the Fortin research finds ‘the tax-transfer return the federal and Quebec governments get from the program significantly exceeds its cost’ by a whopping 47 per cent – just over $1.6bn.
The economics of childcare alone should focus policymakers on the question of how to provide universal, low cost provision. However, there are also wider policy reasons to consider this a priority. Affordability of childcare is inextricably linked to gender pay inequality, as women take a long term wage drop from periods of withdrawal from the workplace and reduced time in the workplace to cover the often short hours of childcare provision. It is also linked to the issue of poverty – making work pay for single parents is one of the most important drivers of poverty reduction.
That childcare costs act as a significant barrier to work is hardly surprising and would be instantly recognisable to most families with small children, even of reasonably high incomes. The decision to work instead of stay at home is partly emotional, of course, but it is also significantly financial. There is little doubt that paying for the high costs of childcare in the UK out of post-tax incomes makes work look very unattractive even when incomes are reasonably high. If someone sees the first 20 hours of their working week going to pay for childcare, the decision to go to work might not be so appealing.
The economic hit is a compound one – productive people are taken out of the workplace and demand for childcare is reduced. The other way of looking at this is that someone in work will also be paying for childcare, both of which will help the economy.
Soon the removal of child benefit for higher-rate taxpayers will hit the wallets of middle England. Add to this mix the reductions in child tax credit and the cut in the levels of tax-relief available under childcare voucher schemes and a growing bundle of measures under this government is making life very difficult for families with young children. It is also a set of measures that is reducing incentives to work.
The principle underlying work replacement benefits is that work has to be more lucrative than not working. To make that calculation work it has to include all the costs of working, including the high costs of childcare. That choice also has to be simple, not based on a patchwork of benefits and reliefs that work in complex theoretical models but hardly ever in practice.
Instead of the tortuous and bureaucratically burdensome attempt to take higher-rate taxpayers out of the child benefit system the benefit itself should be sacrificed to help pay for the upfront costs of provision of childcare. This might, as IPPR has suggested, be through a freeze on levels. I would add to this a tapered removal of child benefit over the next five years. There should be a decent pre-tax childcare allowance for all parents, to allow choice to buy provision and to make work pay. The current complexity of allowances and benefits should be stripped away to help fund the package and make it easier for people to understand the system.
Labour should sign up now to universal, low cost childcare provision as an early policy pledge to support low and middle income families. Such a policy will help growth but it is also a social justice measure. The policy should be delivered through demand side support for a mixed economy of state (subsidised) and private provision. If it is the right package with the right effects, the policy should pay for itself.
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Ian Moss was head of strategy at the Department of Work and Pensions 2006-9. He tweets @_ianmoss
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