Childcare: how to price the poor out of the market, and then subsidise them back in again
They took it seriously. During the New Labour years, public spending on childcare rose by around 12% in real terms every year. Childcare subsidies now come in all shapes and sizes: cash and kind, means-tested and universal, work-contingent and age-contingent. The Childcare Element of the Working Tax Credit (WTC) refunds 70% of formal childcare costs. Under the Early Years programme, all three and four year olds (and sometimes two year olds) are entitled to 15 hours of free nursery schooling per week. Most Sure Start Children’s Centres offer childcare services at subsidised rates. And then, there are programmes which incentivise employers to co-finance their employee’s childcare costs, for example through tax-deductible childcare vouchers, or to provide childcare services themselves.
In total, public spending on childcare has long caught up with the Nordic countries. In terms of public childcare spending (as a share of GDP), the UK is ahead of Norway and Finland, and drawing level with Sweden. So surely, the childcare problem must now be resolved, and the UK must have become a childcare paradise?
Far from it. For families on low-to-medium incomes, childcare affordability is as much of an issue as ever, if not more. The simple reason is that while spending on childcare subsidies has exploded, so has the cost of childcare, and the effect of latter development has offset much of the effect of the former. We can see that in the outcomes. Among low-income households with children, just over a quarter are enrolled in some form of childcare provision. That is not a low proportion; it is about equal to the Western European average – but most of continental Europe achieves the same outcome at a fraction of the cost. We pay for a Mercedes, but we get a Volkswagen to drive.
The poverty industry, as always, concludes that government spending is still far too low. The Child Poverty Action Group, characteristically, takes issue with the fact that some childcare subsidies are linked to work: ‘Targeting financial support for childcare via working tax credit (and in the future via universal credit) reinforces the message that childcare is primarily designed to enable parents to work. This may exclude the most disadvantaged children whose parents are not in work.’ What would never occur to them is to ask why childcare has become so costly in the first place.
Childcare provision was once a relatively informal activity. It has now been turned into a heavily standardised, uniform sector. David Cameron was right to point out in his EU speech that not everything has to be harmonised – but this is also true within the country. The high level of regulation, and the monitoring that goes along with it, comes at a cost. Perhaps the most obvious example is staff ratio regulations: childcare providers have to have at least one adult per three children. This prevents the spreading of fixed costs, and turns childcare into a much more labour-intensive service than it has to be.
Childcare should be radically deregulated. Childminders and nurseries should be free to experiment with cost-effective forms of provision, and parents should be free to decide whether these are appropriate for their children or not. Once we get the cost under control, the promised benefits of more widespread access to childcare services may yet materialise.
Kristian Niemietz is the author of Redefining the Poverty Debate: Why a War on Markets is No Substitute for a War on Poverty.