Tax-free childcare - unfair all round

Is the Coalition being fair to families?  The Bishop of Exeter and, he claims, many of his colleagues believe it is not being fair because a number of Coalition tax and benefit decisions have penalised stay-at-home parents.

This is a concern which is not confined to our Lords Spiritual.  Paul Goodman has forcefully argued that the new childcare scheme announced in the Budget is unfair to stay-at-home parents.  And it was a point rammed home to Nick Clegg in his LBC phone-in last week by an angry mum who asked the question: why not route support through child benefit which would give parents a choice as to whether they their spent the money on childcare, or on items that benefited their children in other ways?

The point was pertinent given that a likely part of the rationale for finding new funds for childcare was to compensate parents for the child benefit they have lost in recent years. Many commentators have drawn attention to the inequity of the new scheme with better-off families earning up to £299,998, while stay-at-home mums now see their child benefit tapered away after one parent earns more than £50,000 a year.

Less attention has been paid, however, to those parents below this earnings threshold. This much bigger group of parents are also seeing their child benefit dwindle away in real terms, first as a result of a three-year freeze in value since 2011 and second, by the decision to uprate child benefit at a  below inflation 1 per cent for the next two subsequent years. In practical terms, families with one child will have lost a grand total of £518 for their first child over the period, and a further £342 for every subsequent child.

These lower income parents face an unholy mess in terms of childcare support in the future. Parents who are currently eligible for childcare vouchers will be able to choose whether to migrate to the tax-free childcare scheme or not, and will have to work out which system leaves them better off. New parents will need to navigate the complexities of the system now being introduced and have their financial relationship with their childcare setting mediated by a voucher company.

But parents on the lowest incomes have even less to be thankful for. The government has suggested that some parents will be offered help with 85 per cent of childcare costs as part of universal credit (UC), an improvement on the current level of support of 70 per cent available through tax credits, and indeed the 80 per cent of costs they were able to claim before 2011. However, this seemingly generous offer could be hedged in so many ways that only a small number of working families on UC stand to benefit when the scheme is introduced.

The key restriction the government looks set to place on this extra childcare support is to limit it to those parents on UC who are earning enough to be taxed. In couple families, both must be earning enough to be taxed. For those in low-paid jobs this is a high bar to hit, and one, of course, that has been raised even further after the chancellor’s announcement last week that the tax threshold will increase to £10,000 a year in 2014/15.

In fact, a quick look at the most recent tax credit statistics show that the vast majority of low-income parents who currently get help with childcare costs do not earn enough to put them in the taxable bracket. These figures suggest that at least three-quarters of poorer working families would not be eligible for additional help under the new childcare scheme if it was available for all ages of children.

Add all these families together with the others who will not benefit from the new UC arrangements – families with only one earner, for example, and those who do not earn at all – and it is possible to see how skimpy the new scheme really is. We’ve known for a long time that child benefit is a real lifeline for many parents; but the new childcare offer provides little, if any, compensation for the majority of families who are seeing their child benefit diminish, whether they are wealthier families or poorer families. And, we know from our Cost of a Child research, with the Joseph Rowntree Foundation, that childcare represents only 40 per cent of what children cost – child benefit is there to deal with the remaining 60 per cent of costs.

The government, sensibly, has indicated that it will consult on aspects of the new tax-fee childcare scheme, and will pay especial attention to how it will operate in conjunction with childcare support under UC. However, if there is new money to be spent on childcare, countries such as Denmark, Norway and France suggest the best approach is to directly subsidise childcare providers, bringing down the costs for all parents and delivering high quality early childhood education and care.

Affordable, high quality childcare helps account for why these countries have significantly lower rates of children living in workless households than the UK, and hence is a significant part of the reason why they also have lower child poverty rates than we do.

So the new tax-free childcare has the hallmarks of a missed opportunity all round when it comes to  fairness for families – for wealthier and poorer families and for important social goals like reducing UK child poverty to levels comparable with other developed countries.