Tax-free childcare 'will not cut childcare costs'

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Families will continue to spend more than a quarter of their household income on childcare, even after Tax-Free Childcare is introduced, a think-tank has warned.

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Families typically spend more than a quarter of their household income on childcare

An analysis of childcare costs by the IPPR claims that the Government’s plans for the scheme – more details of which are expected in the Chancellor’s Autumn Statement tomorrow – will not make the cost of childcare more affordable for families.

The think-tank says that a longterm solution is needed and that the scheme only offers a 'short-term fix'.

Its data shows that taking Tax-Free Childcare into account and inflation, the percentage of family income spent on childcare would continue to rise, from 25.4 per cent in 2013 to 27.8 per cent in 2018.

The IPPR’s solution is to call for a more radical approach to curb spiraling childcare costs, with direct payments to nurseries and childminders, or direct childcare provision available for families.

According to the analysis, in today’s prices the net cost of childcare for a family with two children aged two and four in full-time care is £10,970. This is in addition to the free early education places of 15 hours for 38 weeks and the extra support offered through childcare vouchers (worth £1,870 a year).

If both parents were working full-time at median weekly earnings, the IPPR said they would expect their joint disposable income to be £43,110. This includes their post-tax earnings, the amount they receive in child benefit, and the amount they spend on childcare vouchers before tax less the £1,870 they save in tax and NI. This means they spend 25.4 per cent of their disposable income on childcare.

Up-rating to 2018 childcare prices the amount this family would spend on childcare rises to £12,610 in today’s prices, or 27.8 per cent of disposable income.

The figures are based on the Family and Childcare Trust averages of price inflation since 2008, incomes using the OBR forecasts for earnings growth, and all the other figures using CPI, and incorporating the £2,550 this family would get as a benefit through Tax-Free Childcare if the eligible amount is up-rated each year.

Dalia Ben-Galim, associate director at IPPR, said, ‘With childcare costs still running way above inflation, it is possible that the Chancellor will announce further action to help parents with the high cost of childcare.

'But tax-free childcare on its own will not make childcare more affordable for families. The Government has not got a plan to regulate the market, nor control prices, which makes pumping tax relief into the system a short-term fix with long-term price rise consequences.

‘A more radical reforming approach to childcare costs is needed. Direct childcare provision or direct payments to childcare providers would be more effective at achieving lower childcare costs and would be more effective at driving up quality provision.’