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Good news on support for childcare could be made better with a bit of imagination and very little cost

March 11, 2015

My report for Gingerbread

An unsung success of government policy in recent years has been a great expansion in support for childcare, which has certainly helped more low income parents to work.  It’s easy to forget that twenty years ago there was virtually no such help, and this helps explain why parental employment remained much more resilient in the last recession than in the previous one, around 1990. It has also helped allow the majority of single parents to work, rather than a minority as in the past.

But that success has been undermined by soaring childcare fees, by the difficulty many families have in finding suitable forms of childcare and, since 2011, by a serious cut in targeted support. Families on tax credits currently have to pay 30 per cent of childcare fees, rather than 20 per cent previously. So it’s good news that the government has done an about-turn on this, and from next year will raise its own contribution (in Universal Credit, which is replacing tax credits) to 85 per cent, leaving only 15 per cent of the cost to the family.

The single parents’ charity Gingerbread has been bringing out a series of excellent reports giving a thorough insight into the incredibly tough time being faced by single parents, in its Paying the price series. The latest one, on childcare, shows that affording this expense remains so problematic for many single parents that half of them borrow money to do so. As part of this latest work, I looked at the extent to which the projected increase in childcare support would help single parents to work and allow them to afford a decent standard of living for their families.

The good news is that it will help make work worthwhile and in some cases allow families to bridge the gap between their present disposable income and what they need to make ends meet at a basic level. The subsidy will greatly reduce the number of working parents who would actually lose money by extending their hours, because childcare costs exceed additional take-home pay.  This will potentially allow more single parents to make ends meet by working more hours, though for those on low wages, even full-time work will still not be enough to meet the minimum needs of their family, as defined by members of the public in our research.

But here’s the real catch. The government understandably puts limits on how much people on tax credits and Universal Credit can spend on childcare and get this subsidy.  But these amounts (£175 a week for one child, £300 for two) have not increased since 2005, since when childcare costs have risen 70%. So a limit previously  designed to avoid extravagance is now hitting people with average childcare costs. Under the new system, those who hit the limits will still be worse off working full time than part time.

How much would it cost the government to raise the ceiling on costs and avoid this problem? Possibly nothing: it may even cash in. This is because if families took advantage of this change and increased their hours, they would be paying more taxes and some of their gains would be recouped through means testing, offsetting the cost of higher childcare support. Since their wages would be higher, everyone would gain. This may be a case of the government using a bit of imagination to see that a higher entitlement could pay for itself, and most importantly bring its quest to make work pay that much closer to succeeding.

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