Why childcare subsidies have been ineffective

Earlier this week the Institute for Fiscal Studies published the results of two related research projects evaluating the effects of providing 15 hours a week of ‘free’ childcare to three-year-olds in England. Although the researchers are to be congratulated on their careful and interesting studies, their findings are unsurprising to those who have followed the debate over childcare in the last few years.

The ostensible justifications for subsidising childcare and early education are twofold: to enable more mothers to return to work while their children are young, and to improve the educational performance of children from disadvantaged socio-economic backgrounds.

An optimist might think that highly targeted subsidies and careful monitoring could conceivably achieve these objectives. However political considerations led the last government to offer a subsidy to all parents, at a current cost of about £800 million per year. The results have been predictably poor.

Few extra parents, perhaps 12,000 across the whole country, have taken paid work – and these mostly on a part-time basis. The savings on benefits paid to stay-at-home parents have been negligible. 5 out of 6 three-year-olds would have been in paid childcare anyway, so the policy was largely a – no doubt welcome to parents – general subsidy. It may have led some parents to extend the hours of childcare they used. In the context of a supply-constrained childcare sector this boost to demand may, however, have had the effect of pushing up the cost per hour of care, so that the actual savings to mums and dads were less than the subsidy paid.

From the research it appears that children from socially deprived neighbourhoods did significantly better when assessed at age 5 for the Foundation Stage Profile as new childcare places were provided. However, as earlier studies have suggested might happen, these positive effects had completely disappeared when the children were tested at Key Stage 2 (age 11).

So the lasting effects of the policy were almost entirely those of subsidising parents who would already have been placing their children in childcare – a classic example of ‘deadweight loss’. Will this make politicians think again, perhaps scrapping the subsidy and making some public spending savings, while undertaking some significant deregulation of the sector which, as IEA authors have argued consistently, is the sensible way to bring down the cost of childcare in the medium term?

It is very doubtful. It is always extremely difficult to remove a subsidy once granted, particularly one to a large, clearly defined and articulate group such as the parents of young families. In the present political climate the Conservatives are not going to upset Mumsnet. Nor are the Liberal Democrats, whose suck-it-and-see profligacy with public money when it comes to educational causes has again recently been demonstrated by the £1 billion a year bill for free school meals for 5-7 year-olds. Indeed their current policy is to extend 15 hours free childcare to all 2-year-olds. As up to 40 per cent of 2-year-olds, those from broadly defined disadvantaged groups, already have such an entitlement, it seems even less likely that further provision will bring those elusive benefits in terms of parental employment or educational improvement. The Labour Party, meanwhile, wants to increase the current entitlement for 3- and 4-year-olds to 25 hours at a cost of an extra £1 billion or so.

These policies are unlikely to be abandoned in the light of the IFS work. Indeed the research might even encourage those who have dug this particular hole to dig even deeper. If encouraging 3-year-olds into pre-school education hasn’t had the desired effects, let’s see what we can do with 2-year-olds.

It all shows just how little effect rational analysis and ‘evidence-based policy-making’ actually have in practice, and how unlikely it is that we are ever going to be able to reduce the current level of government spending until an even more serious economic crisis comes along than that we have experienced in the last few years.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.