Following on from the publication of our recent IEA childcare discussion paper, I have received a number of interesting communications from those involved in childcare. One was from a Guernsey States Deputy, who tells me that seconded UK civil servants are trying to impose a very similar subsidy regime to that in operation here – with a substantial amount of universal ‘free’ childcare.

I really hope they don’t go ahead. To remind you of the set-up in England (the other parts of the UK have slightly different arrangements): all three- and four-year-olds and 40% of two-year-olds are currently entitled to 15 hours of childcare a week for 38 weeks of the year. This will go up to 30 hours a week in September for all but the most affluent working parents.

The payments are complicated: they vary by region and by the age of the children concerned (this reflects the different mandatory staffing arrangements for very young children).

The current dispensation is already causing considerable problems. The amounts paid per child are based on cost averages, and many providers find that they do not cover all the expense of providing care (which has been significantly increased by new government regulations about staffing and qualifications). Providers cannot charge directly to make up the difference, so they have to cross-subsidise by charging extra for parents who require more than the 15 hours, or who are not entitled to support because their children are too young. Unsurprisingly there are poorer areas where most parents, many of whom are on benefits, only use the ‘free’ childcare and there are few parents to pay extra for the cross-subsidy.

This is already causing providers to leave the industry and exacerbating the shortage of childcare. But the prospects for the industry after September are seriously worrying. In a just-published survey the Professional Association for Childcare and Early Years (PACEY) reports that only about 40% of respondents say that their setting will offer the full 30 hours, with over 30% saying that they will definitely not offer the new entitlement and the rest undecided. There are big regional differences which suggest that the government’s regional rates offered do not match local costs. For example, while over 50% of providers will be offering 30 hours in the North East, the figure falls to only 30% in London and the East of England. Moreover the refuseniks are much more concentrated amongst childminders than amongst nurseries. Childminders, whose numbers continue to fall, find the bureaucracy associated with the current regime much more difficult to cope with than do nursery schools and other institutional providers.

All this suggests that the ‘free’ childcare provision is going to have the effect of driving out providers, increasing the scarcity of affordable childcare, and raising costs for those not entitled to the government’s largesse.

If we really need to provide general subsidies to childcare – which by the way Ryan Bourne and I would dispute – it would surely be better to provide childcare vouchers for a limited amount. These would have to be topped up by parents to meet the real cost of childcare delivery. Providers would be relieved of excessive dependency on government, would be able to set their own prices and operate profitably without cross-subsidisation. It would also mean parents, by having to make a cash contribution, would return to being genuine consumers rather than simply recipients of a state handout. Evidence suggests that this would have little effect on parental labour supply, for the provision of ‘free’ childcare has for the vast majority of parents has just relieved their finances rather than affected their employment choices.

If we don’t switch to such a system, we are going to be perpetuating these problems and encouraging yet more lobbying by interest groups for the government to spend, spend, spend in a time of continuing austerity.

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.

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