Childcare Contents

Conclusions and recommendations

The economic impact of childcare

1.The Government’s current support for childcare may improve productivity by allowing parents to re-enter the labour market at a level more consistent with their skills. However, the impact on the UK’s overall productivity performance is uncertain and more research would be welcomed. (Paragraph 28)

2.However, to the extent that it increases the employment rate of parents, the Government’s support for childcare will increase GDP, GDP per capita, the tax base and tax receipts. It is also likely to help to reduce the gender pay gap. (Paragraph 29)

3.15 and 30-hours free childcare and Tax-Free Childcare aim to help parents into work. Research suggests that these interventions have only had a small impact on parental employment. (Paragraph 30)

4.The Treasury has made little effort to calculate the economic impact of the Government’s childcare interventions. The Treasury should evaluate Tax-Free Childcare and 30-hours free childcare in order to gain a better understanding of how they affect parental employment and productivity. Until such an analysis is carried out, it is impossible to determine whether the cost to the taxpayer of childcare support is outweighed by the economic benefits. (Paragraph 31)

5.Based on the evidence available, the biggest impact of the Government’s childcare schemes may be to make childcare more affordable to those that receive support, rather than bring parents back into the work place. (Paragraph 32)

6.The Committee notes that many parents choose to care for their young children at home, rather than returning to the labour market, and that the economic value of this activity is not measured in the national accounts. This is a legitimate choice that the Government should take care to respect in setting its objectives for childcare policy. In particular, the over-riding policy objective should be to support parents who decide to return to the labour market, rather than to increase labour force participation among those who choose to stay at home to care for their children. (Paragraph 33)

The design of Government’s childcare schemes

7.The childcare element of Universal Credit plays a crucial role in supporting the lowest-paid parents into work. But requiring parents to pay for their childcare costs up front, before seeking reimbursement later, is a fundamental design flaw that undermines this objective, and should be rectified as a matter of urgency. (Paragraph 42)

8.In particular, the Government should consider how the Department for Work and Pensions could pay the childcare element of Universal Credit directly to childcare providers. Alternatively, it could continue the policy of payment in advance that exists within Working Tax Credits. (Paragraph 43)

9.The rapidly-changing nature of work makes it ever more important that Government encourages lifelong learning and promotes the acquisition of new skills. As it stands, however, most parents considering entering training or education would be deterred by an absence of proper support for childcare costs. Many parents may need to retrain in order to return to work after having children. Failing to extend childcare to parents who need to take on such retraining is therefore short sighted. (Paragraph 49)

10.As part of its efforts to address the UK’s weak productivity performance through the launch of the National Retraining Scheme, the Government should consider removing age restrictions on childcare support for parents entering training or education. In addition, the Government should expand the courses that qualify for childcare support to include courses that individuals or companies finance themselves, rather than just those which are publicly funded, including those seeking English language training. (Paragraph 50)

11.Entitlement to 30-hours free childcare should begin as soon as a child turns three. There is no justification for delaying entitlement, which unreasonably disadvantages parents of children who happen to have been born early in an academic term. (Paragraph 52)

Identified problems within childcare policy implementation

12.With a take-up rate 90 per cent lower than initially expected, Tax-Free Childcare is a clearly under-performing scheme. The Committee received evidence that low take-up can be explained by low awareness among parents of the scheme’s existence. It also received evidence that take-up may also be affected by the fact that some parents may prefer to remain on childcare vouchers scheme. The failure to publicise the scheme properly—a cornerstone of the Government’s childcare policy—is regrettable. The Government should now take all necessary measures to improve awareness and take-up of the scheme. (Paragraph 59)

13.The Tax-Free Childcare website was intended to be available to parents in preparation for the start of the new school term in September 2017. But it failed consistently throughout the summer, causing stress and inconvenience to thousands. Having to close a system for repeated maintenance so soon after it has gone live is unacceptable. The Government should only launch websites when they are satisfied they are able to cope with the workload expected of them. If beta testing phases are necessary, Government should plan these so that problems can be resolved prior to full launch. (Paragraph 71)

14.At present, there are multiple sources of official guidance for different childcare policies. The Low Income Tax Reform Group has highlighted factual errors and inaccuracies in this guidance which the Government should correct. Online guidance should be supported by a specialist childcare support helpline that covers all of the major childcare schemes, with advisers who can help individuals with more complex circumstances, explaining to them what their optimum choice of schemes may be. (Paragraph 72)

15.Applications for all childcare schemes should be made through one single portal, to avoid confusion and to ensure parents are properly informed of the available options. (Paragraph 73)

16.The Government should ensure that its online childcare calculator can take account of Universal Credit entitlements. (Paragraph 74)

17.While the wide range of childcare schemes has provided parents with greater choice and flexibility, the level of complexity has become overwhelming. It is likely that for parents whose circumstances change from month to month it is almost impossible to make the best choice. (Paragraph 77)

18.The Government must set out how it intends to simplify its range of support for childcare costs, and address the complex interactions between different schemes. (Paragraph 78)

19.The Government has committed to carrying out a post-legislative review of Tax-Free Childcare. The Government must include parent feedback on the user experience of accessing the scheme and the ability to use the Government’s guidance to make the correct childcare choice. Once this detail emerges, the Government must make the necessary changes to address the scheme’s shortcomings. (Paragraph 79)

Funding of 30-hours free childcare

20.The Government has stated that it provides £4.94 per hour to fund 30-hours free childcare. Such a figure is misleading firstly because not all this money is passed onto childcare providers—a proportion is retained by local authorities—and secondly, because it includes money for some specific schemes, such as the Early Years Fund, which many providers do not receive. The average rate passed on to private, voluntary and independent providers was £4.34 per hour. (Paragraph 109)

21.A number of different studies have calculated the average cost per hour of providing childcare. The estimates range from £3.72 to £4.68. The Government maintains that its current level of funding per hour compares very favourably to these average costs. However, the Department for Education’s own analysis, as well as the Study of Early Education (SEED) report, show that for certain types of providers, the average government rate passed on to providers of £4.34 is only just above, and in some cases less than, the average costs providers incur. (Paragraph 110)

22.The Department for Education’s 2015 Cost of Childcare Review relies on wage data from a survey carried out in 2013, and rent and other overhead costs from a survey carried out in 2012. The Committee has not seen any evidence to justify the Chief Secretary to the Treasury’s evidence that the increases in the National Living Wage have been factored into the hourly rates provided by central Government to local authorities and childcare providers. It is highly likely that increases in other costs, such as pension auto-enrolment and business rates, have also not been factored into the central Government hourly rates. The Government must ensure that the hourly rate paid to providers reflects their current costs. It should also ensure that the hourly rate is updated annually in line with cost increases. Setting the funding level with reference to wage and overheads data that is more than five years old is unsatisfactory. (Paragraph 111)

23.In response to the 30-hours free childcare scheme, providers are altering their service in ways that were not foreseen when the scheme was designed, and that may undermine the Government’s overarching policy objectives. In particular:

a) Providers are restricting the times at which parents can claim 30 hours. This may lead to childcare provision becoming less flexible for parents than was previously the case—the opposite of what the scheme was intended to achieve.

b) In order to cut costs, evidence suggests providers are cutting back on higher-qualified staff and increasing their child-to-staff ratios. This could reduce the quality of the childcare being offered, working counter to the Government’s intention to improve the child development of three to four year olds.

c) Some providers are charging for services that were previously free, and have increased existing charges for children who are non-eligible (e.g. under threes). Lower-income households may no longer be able to afford the same level of childcare they previously received.

d) Providers in higher income areas will be better placed to mitigate the funding shortfalls than those in more deprived areas, where raising prices is less feasible. This could lead to providers in lower-income areas cutting costs—reducing the quality of care in those areas that could most benefit from it.

These consequences could be avoided were the Government to pay a higher hourly rate to providers and ensure that all the money provided to local authorities was passed on to childcare providers. (Paragraph 112)

24.Evidence submitted to the Committee suggests that some local authorities are having to cut back on childcare provisions for low-income children younger than three, who do not qualify for free childcare, for whom they had previously provided support. Given the high cost of this policy, and the potential for lower-income parents to lose out as a result of its introduction, the Government should explain how it is ensuring that no lower-income parents lose out as a result of its decision to fund 15-hour free childcare to all parents regardless of income, and 30-hours free childcare for parents with incomes up to £100,000. (Paragraph 113)

Tax-Free Childcare replacing childcare vouchers

25.Announcing a six-month extension of the childcare voucher scheme two weeks before it was due to be discontinued for new applicants is no way to manage childcare policy. It is possible that many parents who were better-off under childcare vouchers will have already made arrangements with childcare providers and their employers to start using the Tax-Free Childcare scheme. The eleventh-hour U-turn underlines the Committee’s concerns about the difficulties parents face in making the right choice about which schemes to use. (Paragraph 127)

26.In evidence to the Committee the Chief Secretary to the Treasury stated that there was “administrative and bureaucratic” waste within childcare vouchers that cost “£220 million, more than 20 per cent of the scheme”. This is not correct. It was subsequently made clear that the figure quoted was the national insurance relief that employers receive as a result of the scheme. The Government could eradicate the employer national insurance relief costs of the voucher scheme if it changed the terms of the scheme to only allow employee national insurance relief. (Paragraph 128)

27.When the Committee asked the Chief Secretary to the Treasury to provide an economic analysis of who will gain and who will lose out from the transition from vouchers to Tax-Free Childcare, she was not able to do so. The Government has also failed to provide when asked a comparison between the programme and administrative costs of the two schemes. The Committee expects the Government to provide this information in its response to this Report. (Paragraph 129)

28.The Government’s policy of discontinuing childcare vouchers will result in winners and losers. The Government has committed to carrying out post-legislative scrutiny of Tax-Free Childcare. This commitment must be adhered to and should occur before the scheme closes to new applicants in October. Only once such scrutiny has taken place and the level of take up of Tax-Free Childcare is known will it be possible to understand the extent to which parents have been made better or worse off by the transition from childcare vouchers to Tax-Free Childcare. The Government should therefore consider keeping the childcare voucher scheme open, at least until this information is available. (Paragraph 130)

29.The Committee acknowledges that the childcare vouchers scheme as currently designed only supports parents whose employers provide such vouchers, does not take account of the number of children in a household, excludes self-employed parents, and favours two-parent households over single-parent households. If the vouchers are kept in the long term, these would be compelling reasons to reform the scheme. (Paragraph 131)

30.The Government has committed to providing more help to working parents with their childcare arrangements. Some families will be worse-off under Tax-Free Childcare than they would have been with childcare vouchers. For such families, it will difficult to reconcile the Government’s policy with their own personal experiences. Moreover, it has not been confirmed whether any impact assessments have been conducted to confirm the extent to which low-income households will be affected by the closure of the childcare vouchers scheme. (Paragraph 132)

25 March 2018