Childcare Payments Bill

Written evidence submitted by the Family and Childcare Trust (CP 06)

 

About the Family and Childcare Trust

1. The Family and Childcare Trust works to make the UK a better place for families. Our vision is of a society where government, business and communities do all they can to support every family to thrive. Through our research, campaigning and practical support we work to create a more family friendly UK.

Summary

2. The Family and Childcare Trusts welcomes the extra investment in childcare support through the tax-free childcare scheme, which will help many parent s struggling with childcare costs. We also welcome the increase in the upper cap of support through the scheme from £1,200 to £2,000 and the fast roll out of the scheme from September 2015 to children up to the age of 12.

3. The scheme has a number of features that warrant careful scrutiny and we the Family and Childcare Trust has some outstanding concerns about the proposed scheme, including:

· The flat-rate 20 per cent subsidy is given to all parents earning under £150 ,000. This means that parents on modest to middle incomes will not benefit the most form this investment . In fact, since parents on higher incomes find childcare more affordable, they are likely to use more childcare and be the main beneficiaries of the scheme while middle income parents still struggle with costs.

· The scheme is likely to lead to increased childcare price inflation: the majority of childcare providers are private businesses and there is little incentive for these providers not to increase prices to take advantage of the extra subsidy. In the medium to long term this will reduce the value of the scheme to parents.

· Parents in the most disadvantaged areas and those with disabled children are least likely to have access to flexible, affordable and high quality childcare. As the subsidy does not come with any quality strings attached, and will generally flow to existing providers rather than promote new provision, the scheme will do little to address the persisting access and quality challenges parents face.

4. These issues highlight that the tax-free scheme is a step forward but is not a long term solution to the affordability challenges in childcare. Fiscal constraints mean that new investment should be used where it will have the most impact. The UK is not getting value for money from investment in childcare. Countries that use this model are moving away from it. The Family and Childcare Trust has called for an independent review of childcare funding to make recommendations on simplifying the funding system and long term investment.

5. We also have some concerns about the functioning of the scheme, including the short seven day period parents will have to apply to the scheme before they begin a new job and the narrow definition of qualifying childcare which means that parents, particularly those with disabled children, may have too little flexibility about how they use the scheme. To help address these concerns we would like to see the Bill amended in the following ways:

· Ensure that parents can apply to the scheme more than seven days before they begin work.

· Extend the definition of eligible childcare for disabled children to include childcare used to support parental wellbeing and social inclusion for children .

· Set up local pilots to identify effective ways to deliver inclusive, flexible and affordable childcar e for disabled children, with a view to rolling out a scheme nationally.

· Extend the age lim it for disabled children to 18 in line with the Childcare Act 2006 sufficiency duty.

· Uprate the childcare element of Universal Credit to take account of price inflation to ensure that parents in areas with high childcare prices such as London and the South East do not face childcare barriers to work.

Affordability

6. Childcare costs are a continuing challenge for families: more than a quarter of parents find it difficult to pay for childcare and many are discouraged from working by prohibitively high costs. [1] Families with low incomes remain twice as likely to experience difficulty paying for childcare as those on middle incomes (47% of families with incomes below £10,000 compared to 17% of families with incomes above £45,000).

7. The new childcare subsidy has positive features but will only partially mitigate these problems. The Government estimates that around 1.25 million families with qualifying childcare costs will ultimately be eligible for the scheme. This is slightly more than half of those who pay for childcare, but more than twice the number of parents currently receiving support through the existing voucher scheme. [2] The scheme for the first time provides support on a per child basis and gives parents some flexibility to ‘bank’ support and spend it when needed. However, 80 per cent of those eligible for the tax-free scheme will be in the top 40 per cent of the income distribution. [3]

8. Chart 1 (annex) shows how work incentives rapidly decline for parents on the median income as they move out of eligibility for Universal Credit (the childcare element of Universal Credit is tapered alongside the rest of the award). In this example, a mother in a couple where each partner earns the median wage and is working full time would be working for £6,172 each year (net) after childcare costs and paying 60 per cent of her income towards childcare. Instead of concentrating support to maximise work incentives for families on modest incomes, the tax-free childcare scheme creates a flat-rate subsidy that leaves such families under-supported.

Price inflation

9. The Family and Childcare Trust is concerned that the tax-free childcare scheme will cause childcare price inflation. Cash subsidies to parents may not expand the amount of childcare available but do affect the amount of disposable income available to parents to pay for childcare. Demand side subsidies form around half of spending in the UK and are likely to have some impact on costs. A greater reliance on demand-side subsidies is likely to lead to additional price inflation that may erode the effect of such support. In Australia the introduction of a childcare rebate of 30 per cent coincided with a rise by over 100 per cent between 1997 and 2006 (compared to general inflation of 27 per cent over the same period). [4] I n the single year of 2008, when the childcare rebate was raised to cover 50 per cent of all remaining costs , prices rose by 10 per cent.

Access and quality

10. Many parents face difficulty finding childcare. Almost one in three parents (30%) say there are not enough places in their area and l ocal authorities report large gaps in provision: 46% of local authorities do not have enough childcare for under 2s; 65% for children aged 5-11; and 72% for disabled children. [5]

11. The tax-free childcare scheme will encourage investment in childcare settings serving the most well-off families rather than expanding access in the most disadvantaged areas. In recent years, childcare provision has grown faster in the least deprived areas compared to the most deprived: in 2005, 35 per cent of registered daycare settings were in the 30 per cent most deprived areas compared to 26 per cent in 2013. [6]

12. The scheme will also have little influence on quality challenges in childcare. Private and voluntary provision in the most disadvantaged areas is on average of a lower quality than that in more affluent areas , with a quality gradient working against the poorest children . [7] Using this lower quality non-maintained provision is a necessity for many working parents because it is more flexible than nursery classes or sessional care .

13. To ensure a balanced growth in flexible daycare provision, cash support to parents should be complemented with start-up and sustainability grants to providers offering flexible daycare in the most disadvantaged areas. Childcare funding should also drive quality improvement through quality incentives and through well-targeted support that helps lower income parents to purchase care at good quality settings. The tax-free childcare scheme is a significant injection of funding into the child care system that unfortunately will do relatively little to help address access and quality challenges .

The childcare element of Universal Credit

14. The government’s decision to extend support with childcare costs under Universal Credit to 85 per cent is welcome, but leaves several further problems unaddressed. The upper cap of the childcare element of Universal Credit is currently set at £175 a week for one child or £300 for two or more children. These caps have not been uprated since 2005-06. The rise in childcare costs in the interim means that more low income parents who work full time are reaching this upper cap and paying more towards childcare.

15. This issue particularly affects parents in the South East and London where childcare costs are highest. The upper caps were last increased in 2005/06. At that time, the cap for one child was above the average price of childcare for a child under two anywhere in the country except inner London. Since that time, childcare prices have increased 54.8 per cent. This means that a working parent with one child paying for full time childcare (40 hours) in London would pay £224.19 each week, £49.19 more than the cap of £175 each week. A parent in Yorkshire purchasing the same number of hours would pay £150.45, less than the £175 cap.

16. Such parents are effectively paying an additional tariff each year that childcare prices rise. Between 2012 and 2013, childcare prices in London rose 5.22 per cent. As long as the cap remains static, parents working full time in many areas of the country are paying a steadily increasing proportion of childcare costs. This means that work incentives are likely to be falling or disappearing for an increasing number of parents, undermining the aim of tax credits to make work pay and avoid poverty traps.

17. Second, unlike the tax-free childcare scheme, parents with more than two children do not receive any additional support. This makes full-time work uneconomic for parents in this group. Chart 2 (annex) shows how work incentives decline for parents in London on a low income with more than one child. The tax-free childcare scheme has rightly established the precedent that parents should receive support proportionate to the number of children they have in childcare. The childcare element of tax credits should be adapted to provide support in the same fashion.

Entering and leaving employment

18. The Family and Childcare Trust is concerned that the draft regulations indicate that parents will not become eligible for the scheme until within seven days of the start of employment. For working parents, securing a suitable childcare place often involves a careful search for a place followed by payment of a deposit and four to six weeks of fees in advance. The seven day limit of the new scheme will mean that in many, if not most cases, parents will not benefit from the top up when they pay a deposit and up-front fees to a childcare provider. Extending the seven day period to one month would align the scheme with Universal Credit and ensure the scheme is as beneficial, convenient and straightforward to use for parents as possible.

19. The present design of the scheme in relation to parents who leave employment will also cause some parents problems. Currently, parents will be able to continue to make contributions to the scheme until the end of the last eligibility period for which they made a valid declaration of eligibility. This means that a parent who leaves work at the beginning of an eligibility period will have a relatively long ‘grace period’ whilst a parent who moves out of work towards the end of a period will have a short period of continuing eligibility.

20. Parents who move out of work should have the certainty of being able to benefit from the scheme for a fixed period of at least two months (in line with the childcare element of Universal Credit). This will mean that they have the opportunity to move back into work without facing a sudden spike in childcare costs which could make maintaining childcare arrangements difficult and in turn a return to work more challenging. Sudden changes in childcare arrangements are also disruptive for children, who often have friends and a routine linked to childcare. This issue is particularly relevant for mothers with young children, who during the period they re-join the workforce are more likely than other workers to make frequent changes in employment.

21. The aim of the scheme is to support working parents and the scheme’s design should reflect that aim with sufficient regard for the regular changes in employment many parents make. The legislation already provides HMRC the ability to vary the length of eligibility periods if necessary. Parents who leave employment should have a fixed window of at least two months before they become ineligible to claim top ups through the scheme.

22. Recommendations:

· Uprate the childcare element of Universal Credit to realign the maximum cap with average childcare prices in London, and subsequently in line with inflation.

· Remove the two child cap and establish a maximum cap based on the number of children in childcare.

· Secondary legislation should be amended to allow parents who have secured an offer of employment to apply to the scheme up to one month before their first day of employment.

· Parents should be able to continue to claim top ups through the scheme for at least two months from their last day of employment.

Childcare for disabled children

23. The recent independent Parliamentary inquiry into childcare for disabled children found that parents with disabled children face significant extra challenges finding and paying for childcare. [8] The parents who responded to the inquiry’s survey reported paying above average childcare costs, with 38% paying £11-20 and 5% paying more than £20 per hour. As a result, 72% of families had cut back or given up work because of childcare problems.

24. The inquiry highlighted the limitations of the new tax-free scheme for families with disabled children: additional support of 20% with a £2,000 cap will be of limited help to parents who face costs dramatically higher than the average. The inquiry also heard that out of school and holiday childcare activities were a key means of social inclusion for disabled children and young people. As the tax-free childcare legislation only covers costs for childcare used to enable parents to work, it will not help these families pay for such childcare.

25. The inquiry’s principle recommendation is a long term programme to improve childcare for disabled children. This issue must be a priority for the next government. The government can take several short term steps in the meantime to make progress.

Inclusion and affordability pilots

26. First, the government should establish local inclusion and affordability pilots to test the most successful local approaches to delivering inclusive childcare and develop an effective policy and funding framework that can be rolled out nationally. These pilots should begin as soon as possible and last for at least one year in order to yield useful insight. The results of the pilots can then be used to roll out a national policy programme to support local authorities to deliver the most successful approaches.

Qualifying childcare

27. Second, childcare support through the tax-free childcare scheme and the childcare element of Universal Credit should be made more flexible for parents with disabled children. The draft regulations supporting clause 2 of the Childcare Payments Bill, ‘Qualifying childcare’, state that parents may use the scheme to purchase childcare only where ‘the main purpose, or one of the main purposes of which, is to work’. This requirement may cause problems for all parents but is particularly problematic for those with disabled children.

28. The relationship between work, family life and childcare is not straightforward. Parents with disabled children are more dependent on short breaks from caring to support family wellbeing and manage an often extremely tough combination of caring and work. Disabled children are also more dependent on organised activities which fall within the childcare registration system to stay active, make friends and participate in activities outside of school.

29. The definition of qualifying childcare should be extended to include childcare that supports carer wellbeing or educational and social activities for children. Alternatively, children with disabilities could simply be exempted from the regulation.

Maximum age of qualifying children

30. Finally, the government should also align the maximum age of eligibility for disabled children for the tax-free childcare scheme and the childcare element of Universal Credit to 18. This will align each scheme with the Childcare Act 2006, which places a duty on local authorities to provide sufficient childcare for working parents with disabled children aged up to 18. In practice, limited financial support means that sustainability is a significant challenge and there are few providers catering for older disabled children. Extending financial support to this group would be a step towards overcoming this barrier.

31. Recommendations:

· Establish childcare inclusion and affordability pilots for disabled children to inform a national policy programme.

· Exempt families with disabled children from the ‘main purpose’ qualifying childcare requirement.

· Raise the maximum age of eligibility for disabled children to 18 for both the tax-free childcare scheme and the childcare element of Universal Credit.

October 2014

Annex

Chart 1: Net income and % second earner income spent on childcare, couple with two pre-school children earning median wage [9]

Chart 2: Net income per hour after childcare costs for a single parent in London earning the living wage and receiving Universal Credit [10]


[1] Huskinson, T. et al (2014) Childcare and early years survey of parents 2012-13, Department for Education, p.115

[2] HMRC (2014) Childcare Payments Bill Impact Assessment, p. 6

[3] Alakeson, V. et al (2013) Resolution Foundation analysis of the 2013 Budget, p. 6

[4] Cooke G. and Henehan K. (2012) Double Dutch: The case against deregulation and demand-led funding in childcare , Institute for Public Policy Research

[5] Family and Childcare Trust (2014) Annual Childcare Costs Survey 2014; Huskinson, T. et al (2014) Childcare and early years survey of parents 2012/13, Department for Education, p. 115

[6] Brind, R. et al. (2014) Childcare and Early Years Providers Survey 2013, Department for Education

[7] Mathers, S. and Smees, R. (2014) Quality and Inequality: Do three- and four-year-olds in deprived areas experience lower quality early years provision? Nuffield Foundation

[8] Every Disabled Child Matters et al (2014) Parliamentary Inquiry into childcare for disabled children: Levelling the playing field for families with disabled children and young people

[9] Couple, both parents aged over 25. First earner income median male wage December 2013 (ASHE). Second earner income median female wage. One child age one and one child age three. Childcare costs are £4.40/hr plus one hour (commute) each day. Second child has 11 hours free childcare (pro-rated) and 10 per cent sibling discount. No housing element claimed (higher work allowance). Support with childcare calculated based on optimum award - family becomes better off under tax-free childcare after second earner works 7 hours each week.

[9]

[10] Single parent aged over 25 earning London living wage and paying average London childcare fee (Childcare costs survey 2014)/hr and one hour each day for commute. No housing element (higher work allowance). Child one is age one, child two age three (receiving 11 hours free childcare pro-rated and 10 per cent sibling discount) and child two is aged five using an after school club at the average London rate. 

[10]

Prepared 16th October 2014