Written evidence submitted by Daycare
Trust
INTRODUCTION
1. Daycare Trust, the national childcare
charity, campaigns for quality, accessible, affordable childcare
for all and raises the voices of children, parents and carers.
We lead the national childcare campaign by producing high quality
research, developing credible policy recommendations through publications
and the media, and by working with others. Our advice and information
on childcare issues assists parents and carers, providers, employers,
trade unions and policymakers. Through our research and contact
with parents we have been able to develop a comprehensive picture
of the impact of the welfare system on families with young children,
which we draw on in this submission.
2. Daycare Trust welcomes the opportunity
to respond to the Select Committee's inquiry into the Government's
Universal Credit White Paper.
3. We believe that the availability and
affordability of childcare play a crucial role in supporting parents
to work, and that childcare must be seen as essential component
of welfare reform, not a niche area that can be dealt with separately.
Currently, 488,000 families receive support for childcare through
Tax Credits, 64% of whom are lone parents. They receive an average
of £67 per week (£70 for lone parents, £67 for
couples).
PRINCIPLES OF
THE UNIVERSAL
CREDIT
4. We welcome the White Paper's focus on
simplification and improving work incentives through ending very
high marginal tax rates. Through our research with parents and
the calls and emails we receive to our information service, we
know that the complexity of the current system prevents many people
from claiming the support to which they are entitled, and leads
to errors and incorrect payments.
5. One of the Government's biggest aspirations
is to combine the benefits and Tax Credit systems, and in principle
we support this proposal in respect of the delivery of support.
However in its analysis the White Paper does not pay much attention
to the role of Tax Credits, the specific problems with the current
system, and how the different purposes and practical aspects of
Tax Credits and benefits might be combined. We also believe that
the different parts of the benefits system have very different
purposes, and that the universal and contributory elements should
continue to be available for people who may not be eligible for
mean-tested benefits in the form of Tax Credits.
PROBLEMS WITH
CURRENT SYSTEM
6. The Government's reforms are based on
two problems with the current welfare system; work incentives
for some groups are poor and the system is too complex. Daycare
Trust agrees that these are both major problems, which prevent
parents from accessing the support they need. The Government rightly
acknowledges that existing in-work support (in the form of Tax
Credits) means that most people should get more income when they
work, but that for many the gains are marginal and incentives
are undermined by the complexity of the system.
7. The White Paper suggests that more than
600,000 people face a participation rate of more than 90%. We
would suggest that for many parents it is much higher than this
because of the need to pay for childcare when entering work. Since
the Government is not proposing any models which would cover 100%
of the cost of childcare, the challenge of reducing marginal participation
rates is therefore even more challenging for parents of young
children.
8. Other specific problems include:
- The Tax Credit system requires parents to calculate
their average childcare costs - based on expected costs if they
are claiming tax credits for the first time - and to report any
changes to their income and childcare costs if the change is more
than £10 per week and is expected to last more than four
weeks. Most families experience changes to their childcare costs
throughout the year, and it can be difficult to keep track of
the changes. Whilst this four week limit would capture a change
for the whole of the school holidays, some families may choose
(or only be able to afford) to only use holiday childcare for
part of the holidays. Reconciliation at the end of the year can
leave parents out of pocket, or owed further payments. Moving
to a more predictable and fixed system would be easier for parents
to understand and manage, but would potentially be less responsive
to individual needs.
- As the Tax Credit system is tailored to specific
family circumstances, it is difficult for advisers to calculate
how much a family will be entitled to. This makes it harder for
parents to feel confident that they will be better off moving
into work.
- We share the Government's concern about the lack
of incentive to enter work at less than 16 hours per week. For
parents returning to work after having a child, starting at a
smaller number of hours may be preferable. It may also be preferable
for parents requiring a phased return to work after illness, for
example.
- It is also inconsistent that the free entitlement
to early education for three and four year olds is 15 hours (it
increased from 12.5 hours in September 2010). A parent using only
this free place, and not paying for additional hours, would not
be able to work enough hours to be entitled to Tax Credits, especially
if travel time needs to be factored in as well. Allowing for half
an hour's travelling to and from work each day, a parent would
need childcare to be available for roughly 20 hours if they were
to work for 16 hours. The free entitlement is therefore five hours
short of parents' needs. For this reason, and because of the proven
benefits of high quality early years education, Daycare Trust
proposes extending the free entitlement to 20 hours per week for
all two to four year olds, and allowing it to be used more flexibly.
- One of the historical problems with Tax Credits
has been overpayments, which meant that many families did not
have confidence in the system. The package of changes introduced
in 2005 - including large disregards for income changes - improved
the situation considerably. We are concerned about the change
to the disregards announced in the emergency budget in June 2010,
as this could make overpayments more likely again. The increase
in the withdrawal rate from 39% to 41% also means that claimants
lose their tax credits at a faster rate when their earnings increase,
in contrast to the aspiration set out in this consultation.
- Parents are required to pay for at least 20%
of their childcare costs (soon to be 30%), and through Daycare
Trust's research with parents we believe this is an additional
deterrent to parents claiming the Childcare Tax Credit. Although
it is argued that this prevents parents from choosing the most
expensive childcare, it has also been suggested that this is intended
to deter providers from putting their prices up knowing that the
cost would be met from the public purse.
- A further failing of the system is that it does
not work for larger families, since the maximum level of childcare
costs that can be claimed for is £175 for the first child,
and £300 for two or more children. There is evidence that
children from larger families have poorer educational outcomes,
so high quality early childhood education and care is particularly
important for this group.
9. As well as the financial calculation
about whether they will be better off in work, parents face significant
practical barriers when moving into work because of the need to
find appropriate childcare and very often to pay up-front costs
such as a holding deposit and a month's fees in advance.[116]
THE WHITE
PAPER PROPOSALS
ON CHILDCARE
10. Childcare costs are specifically covered
in a short section on pages 21-22 of the White Paper. We welcome
the Government's clear statement that financial support with the
cost of childcare is crucial for parents' work incentives. It
then goes on to set out a number of options for reform, and says
that stakeholder views will be sought on how best to deliver the
proposals.
11. Daycare Trust has had a number of meetings
with Department for Work and Pensions officials and Ministers,
in which we have discussed the options contained in the White
Paper. Officials have offered further details on the options set
out and there appears to be a genuine desire to engage and discuss
the options.
12. However, we remain concerned that the overall
level of funding available for childcare support is being reduced
from April 2011, when the proportion of childcare costs that can
be received through the childcare element of Working Tax Credit
is reduced from 80 to 70%. This means a reduction in cash terms
of up to £1,560 for families with two or more children, which
does not include the impact of the other changes to tax credits,
such as the freeze in the basic and 30 hour elements of Working
Tax Credit, the change in uprating from RPI to CPI, or the reduction
in the taper from 39 to 41%. The real impact on families' budgets
will therefore be even greater.
13. Furthermore, the Government has announced
its intention to extend childcare support for those working for
fewer than 16 hours. We welcome this development as it encourages
progression in the workplace by incentivising fewer hours of work.
However we are concerned that without additional funding, this
change will mean that existing funding is spread more thinly,
and does not provide sufficient levels of support for parents
to make realistic choices about work.
14. Daycare Trust has yet to make a final decision
about the details of a revised system which we would wish to see,
and are continuing discussions with DWP and others in the sector.
However through discussions with others, we have established a
number of principles which we believe the new system should embody:
- (a) Directly subsidised free, universal
childcare provides the strongest work incentives
Free childcare provides the clearest work incentives
of all and prioritises child development goals above all else.
Greater supply-side subsidies are needed to ensure high quality
childcare is available for all, including out of school and holiday
childcare, and is the best way to support highly qualified staff
and a sustainable childcare industry.
- (b) In an ideal world, any demand-led
childcare subsidy would be paid outside of any system of benefits
and credits
This would simplify the system, make sure people
understand what they're getting towards childcare costs, and could
pay higher levels of funding for better quality, as has happened
in New Zealand for example.
- (c) Any system chosen should promote/
stimulate high quality provision
There is very strong evidence for the UK that early
childhood education and care leads to improved outcomes for children
and the effects are the most long lasting for children from disadvantaged
backgrounds. However, only high quality childcare has this effect.
Childcare quality is the worst in the most disadvantaged areas
and there is also widespread market failure in these areas.
- (d) Clarity - claimants must know how
much they are getting
Claimants need to see support for childcare costs
as separate to other in-work benefits, to know that they can afford
their childcare and still have money for other living costs. It
is essential that parents are able to understand the system, and
that through simple tools are able to calculate how much they
might be entitled to.
- (e) Simplicity - with fewer reporting
requirements and the use of fixed-term payment periods explored
Parents should have reduced requirements to report
changes in income and childcare costs.
One way to achieve this would be through the use
of income bands as previously explored in the Treasury's 2008
consultation. In previous consultations Daycare Trust has expressed
its support for income bands, which we see as a "lighter
touch" means-test which would substantially reduce the complexity
of tax credits and introduce greater transparency on entitlement.
There is some trade-off between the greater simplicity and certainty
this offers versus the rough justice it would introduce for those
at the edge of the income bands. Our judgement is that certainty
is more important to parents. However, concern has rightly been
expressed about those people who are moving in and out of low-paid
work. Such a system could, however, incorporate protection for
those whose circumstances change through voluntary reporting.
Another option suggested by Daycare Trust in our
response to the Government's previous consultation, and mentioned
in the White Paper, is for a discount scheme. Under this proposal
parents could receive a percentage discount voucher which they
then present to their provider in order to receive a reduction
in their childcare bill. Under the current system the Government
calculates the percentage of childcare costs to which the parent
is entitled (up to 80%), and converts this to a cash amount. Under
this proposed system, they would not do this last step but would
instead inform the parent of the percentage discount to which
they were entitled, perhaps with an upper limit for the value
of discount. The provider would then redeem this later from HMRC.
This would mean that the provider would not need to know all the
details about the family finances, but would ensure that they
received the money that was intended for the cost of childcare.
This could work well from parents' perspectives, because if their
childcare cost varied from week to week, they would get the same
proportion discount each week. It could also create a mechanism
for different people to receive a different level of support,
for example depending on the age of the child or the type of childcare
used. It could also be used to incentivise higher quality services,
and could generally facilitate greater flexibility in the amount
of payment received.
- (f) There must be clear work incentives
and it should encourage progression in work
Help with childcare costs must be at a level which
makes work pay. It must also be delivered in a way which ensures
people feel encouraged to enter work (i.e. they are confident
in their childcare) and progression.
- (g) It should be paid to parents and not
to providers
This makes the work incentives point clearest and
encourages parents to take responsibility for their childcare
choice. We have not seen any evidence that there are higher levels
of fraud for the childcare element than for any other benefits,
and parents would not be comfortable with their childcare provider
having access to information about their financial circumstances.
Furthermore as no system proposed would cover 100% of the cost,
providers would still need to seek payment directly from parents,
which would lead to complexity. We are also worried about the
significant administrative burden that providers would face if
they were to receive payments directly, as well as seeking payments
from parents for the remainder of their bill. It is also unclear
whether responsibility for paying back overpayments would become
the responsibility of the provider.
- (h) It should be available both in and
out of paid work
This ensures that the poorest and most disadvantaged
children are not ruled out from receiving high quality experiences
which could improve their outcomes because their parent is not
in paid work.
- (i) Ensures stability for the child
The child needs to be settled in childcare before
any job starts if it is going to be a success, and they should
not be withdrawn from a childcare setting if the parent's work
pattern fluctuates. This means that there should be support available
whilst looking for work and that there should be extensive run-ons
when paid work ends.
- (j) Accurate and quick decision-making
Parents need confidence in the system and accurate
decision-making is essential.
- (k) Expandable as the economy improves
Even though the Government is designing a new system
for a fixed amount of funding, the new system should have the
potential to be scaled up when additional funding is available.
This could be done by increasing the proportion of costs that
are covered, changing the taper or making other changes to the
qualification requirements which allow more parents to receive
support.
MAKING PAYMENTS
15. The Government wishes to improve the responsiveness
of the system through the use of smart automation. Making benefits
more responsive to actual income will improve the accuracy of
payments, and reduce the possibility of overpayments, which caused
so many problems with the Tax Credit system. The problems with
the Childcare Element of the Working Tax Credit relate to the
need to use past income and past childcare costs (averaged over
a year). This is complicated for parents to understand, and can
lead to over and underpayments. We therefore welcome the idea
of using real-time income information. However, further consideration
needs to be given as to how up-to-date information about childcare
costs can be gathered most effectively.
16. The most crucial test that must be applied
is whether parents can trust the system. Certainty of income is
one of the most important considerations, and any technical or
communications failure could have dire consequences for people
relying on benefits.
CONDITIONALITY
17. The Government has already stated its intention
to require lone parents to actively look for work when their child
is five. When the previous Government instituted previous welfare
reforms and reduced the age to seven, Daycare Trust, along with
other organisations, successfully argued for exemptions so that
lone parents could restrict their job search to jobs within school
hours or for which they could find appropriate childcare. We understand
that this exemption will remain when the age is reduced to five,
which is to be welcomed, but this must be accompanied by greater
efforts to improve the availability of out-of-school childcare
for primary school children, which remains an underdeveloped area,
and is at risk of budget cuts from local authorities. It is already
very hard for parents to find reliable, high quality wraparound
childcare, and even more difficult for parents of disabled children.
18. We would also welcome clarification on how
the lone parent exemptions mentioned above will interact with
the proposal to reduce Housing Benefit by 10% if someone is claiming
Jobseeker's Allowance for more than 12 months. We believe that
given that lone parents have been given this essential and legitimate
exemption because of a lack of suitable childcare outside of school
hours, they should not be punished for taking longer to find a
job.
19. We would also welcome clarification about
whether childcare will be provided for claimants required to undertake
mandatory work activity, as this is not mentioned in the White
Paper yet would be essential for any job seeker with childcare
responsibilities.
CONCLUSION
20. In conclusion, we welcome the principles
behind the Universal Credit, and the Government's recognition
that childcare costs are a key determinant of work incentives.
We have set out a number of principles which we believe should
underpin the new system, and look forward to working with the
Committee and the Department for Work and Pensions in the coming
weeks to ensure that the new system is transparent, simple and
clearly understandable to parents.
December 2010
116 Bartholomeou et al (2009) Childcare Advance:
scoping the need for help with up-front: Daycare Trust; London. Back
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