EXCERPTS:
The Chancellor's Autumn Statement this week will focus on living standards. With payday lending and energy markets recently climbing up the political agenda, there is a growing emphasis on the way markets work, and politicians are keen to offer solutions to keep costs down. Given that childcare costs run way above inflation, it is possible that the Chancellor will announce further action to make childcare more affordable.
The Government is working hard to support families with the costs of childcare, recognising that early years provision is important not only for children's educational development and helping women back to work, but it's also a key election issue.
The market is currently funded through a combination of ‘supply funded' mechanisms - primarily through the free entitlement (15 hours of care for 3 and 4 year olds and disadvantaged 2 year olds) - and ‘demand-led funding' (such as tax free employer childcare vouchers and support through Universal Credit).
In the 2013 Budget, a £750 million annual package was announced with most of that (£550 million) to extend tax-free childcare from 2015. The rest (£200 million) is to fund additional support through Universal Credit. This money is significant investment and we would expect the childcare market to respond in some way.
It is positive that the Government is working to lower the costs of childcare for families, but there are real concerns on the horizon that suggest their current road may not lead to more affordable childcare.
The Australian case is most striking in how the expansion of this kind of ‘demand-led funding' can lead to increased costs without necessarily increasing quality.
Reforms in the late 1990s signalled a move to demand led funding. There was a much needed increase in the supply of places, but public expenditure rocketed beyond policymakers' expectations (from $500m AUD (£278m) in 1996 to $3.3bn AUD in 2008), as did costs for parents. Between 1996 and 2007, childcare costs ballooned by over 100 per cent (compared to a rise in general inflation of 27 per cent over the same period). And in 2008 when the childcare rebate was extended to cover 50 per cent of all remaining costs (from 30 per cent), prices continued to rise by 10 per cent as many providers saw it as an open invitation to raise their fees.
Once fully operational, the UK's expanded tax-free childcare scheme would be worth up to £1,200 per child, saving a typical working family with two children under 12 up to £2,400 a year. But the Government is already facing challenges. That tax-free childcare is regressive, skewed towards benefiting higher income families, not the ‘hard working families' in the Chancellor's focus groups.
And IPPR's new analysis shows more trouble brewing over the next few years. In today's prices, the net cost of childcare for a family with two children aged 2 and 3 in full-time care is £10,970. This is after accounting for 15 hours free for 38 weeks and the extra support offered via vouchers (worth £1,870 a year). If both parents were working full-time at typical weekly earnings, we would expect their joint disposable income to be £43,110. This includes their post-tax earnings, the amount they receive in child benefit, and the amount they spend on childcare vouchers before tax less the £1,870 they save in tax and NI. This means they spend 25.4 per cent of their disposable income on childcare.
If we look ahead to 2018, uprating childcare prices using the Family and Childcare Trust averages, all the other figures using CPI, and incorporating the £2,550 this family would get as a benefit through tax-free childcare if the eligible amounts increase in line with inflation, this figure increases to 27.8 per cent of disposable income.
This increase is worrying. Tax-free childcare on its own does not seem likely to make childcare more affordable for families. The Government has not proposed how they would regulate the market, nor control prices, making a demand led strategy unstable despite significant investment.
It is clear that more radical reforms are needed as affordability and quality will remain critical. Supply-funded systems that offer direct childcare provision or direct payments to childcare providers tend to be more effective at achieving lower net childcare costs compared to their total expenditure as well as a focus on high quality provision. Many of these systems also cap costs for parents to ensure fairness.
Early years provision is not a commodity that should be largely provided and regulated by market forces. The current direction of travel suggests that costs for parents will continue to spiral despite Government investment. If early years provision is to deliver better outcomes for children, families and society, more radical reforms are urgently needed
-reprinted from the Telegraph