Childcare: how to price the poor out of the market, and then subsidise them back in again

When New Labour came to power, one in five children lived in a household with no adult in work, so it was not unreasonable that parental work levels became a priority for the new government. A key element in the strategy they devised to this end was the extension of childcare subsidies. Lack of affordable childcare was identified as a major barrier to work, so the hope was that once childcare was subsidised generously enough, parental employment would surge - just like in the Nordic countries, which also combine generous childcare subsidies with some of the highest employment rates in the world.

They took it seriously. During the New Labour years, public spending on childcare rose by around 12% in real terms every year. Childcare subsidies now come in all shapes and sizes: cash and kind, means-tested and universal, work-contingent and age-contingent. The Childcare Element of the Working Tax Credit (WTC) refunds 70% of formal childcare costs. Under the Early Years programme, all three and four year olds (and sometimes two year olds) are entitled to 15 hours of free nursery schooling per week. Most Sure Start Children’s Centres offer childcare services at subsidised rates. And then, there are programmes which incentivise employers to co-finance their employee’s childcare costs, for example through tax-deductible childcare vouchers, or to provide childcare services themselves.

In total, public spending on childcare has long caught up with the Nordic countries. In terms of public childcare spending (as a share of GDP), the UK is ahead of Norway and Finland, and drawing level with Sweden. So surely, the childcare problem must now be resolved, and the UK must have become a childcare paradise?

Far from it. For families on low-to-medium incomes, childcare affordability is as much of an issue as ever, if not more. The simple reason is that while spending on childcare subsidies has exploded, so has the cost of childcare, and the effect of latter development has offset much of the effect of the former. We can see that in the outcomes. Among low-income households with children, just over a quarter are enrolled in some form of childcare provision. That is not a low proportion; it is about equal to the Western European average – but most of continental Europe achieves the same outcome at a fraction of the cost. We pay for a Mercedes, but we get a Volkswagen to drive.

The poverty industry, as always, concludes that government spending is still far too low. The Child Poverty Action Group, characteristically, takes issue with the fact that some childcare subsidies are linked to work: ‘Targeting financial support for childcare via working tax credit (and in the future via universal credit) reinforces the message that childcare is primarily designed to enable parents to work. This may exclude the most disadvantaged children whose parents are not in work.’ What would never occur to them is to ask why childcare has become so costly in the first place.

Childcare provision was once a relatively informal activity. It has now been turned into a heavily standardised, uniform sector. David Cameron was right to point out in his EU speech that not everything has to be harmonised – but this is also true within the country. The high level of regulation, and the monitoring that goes along with it, comes at a cost. Perhaps the most obvious example is staff ratio regulations: childcare providers have to have at least one adult per three children. This prevents the spreading of fixed costs, and turns childcare into a much more labour-intensive service than it has to be.

Childcare should be radically deregulated. Childminders and nurseries should be free to experiment with cost-effective forms of provision, and parents should be free to decide whether these are appropriate for their children or not. Once we get the cost under control, the promised benefits of more widespread access to childcare services may yet materialise. 

Kristian Niemietz is the author of Redefining the Poverty Debate: Why a War on Markets is No Substitute for a War on Poverty.

"Perhaps the most obvious example is staff ratio regulations: childcare providers have to have at least one adult per three children." Kristian, the ratio varies with the age of the children. This ratio is only true for the youngest children. Regardless of whether it should be regulated, this ratio isn't unreasonable. The idea that one adult could safely look after more than three very young children at the same time is mistaken. My wife wouldn't want to and I can assure you that she is an expert both through training and experience. Where costs have risen especially is that the regulatory and inspection regimes have raised the cost of childcare (we have to pay for all those inspectors) and these have also reduced the number of people willing to be childminders. Childminders were always relatively cheap because they don't have to pay for special premises and all the other costs than come with formally employing people. The thing that we have to remember is that it makes little sense to subsidise childcare beyond a certain point. Looking after children is labour intensive and you'd want someone reasonably educated to do it for you if you aren't doing it yourself. So why do we expect someone who doesn't earn very much themselves (which is the case for most people) to be able to pay, our of their modest wages, someone else to look after their multiple children and for that to make any economic sense? Economically, it makes as much, possibly more, sense for them to do it themselves - they can only conceivably benefit financially to the extent of any subsidy that is applied.
Kristian - I should add that raising personal tax allowances substantially would help the situation. If you don't have to pay tax (or much tax) on your earnings, then it becomes much more feasible to pay someone else out of your wages to look after your children. It also becomes more worthwhile for someone to become a childminder, for example. The need for subsidies is partly a consequence of high income tax rates.
HJ, it is the ratio for the 1-5 year olds; for the very youngest, the ratio is 1:1. I have no idea what the 'optimal' ratio would be, because I know nothing about the specifics of the service, so I'll accept that you're right on more than 3 children being too many for 1 adult. But I'd be surprised if that was a linear relationship. You may need 1 adult for 3 children, but do you need 5 adults for 15 children? Does it take 10 adults to look after 30 children? I don't know the answer, but I thought the use of economies of scale was the whole point of nurseries (among others). Agreed on the cost of inspectors and the impact of income tax, of course.
Kris - You've got the ratios a bit mixed up. Easily done because childminders, of course, may have have children of different ages cared for by just one person. The 1:1 ratio for babies is actually for childminders who also have other, older, children at the same time. Normally, it has been 1:3 for children from 0-2 (in a nursery setting, for example), 1:4 for 2-3 year olds and 1:8 for children aged 3 to 5. I'm really not sure that, when it comes to childcare, there are any real economies of scale. This is because, for the youngest, nurseries tend to work on a 'key worker' basis (this is simply proven good practice, it is not imposed by regulation). Each child has a key worker assigned to them, so there really isn't much scope for a non-linear relationship of carers in larger settings. People don't use day nurseries because of economies of scale. Those that prefer them generally do so because of facilities, they don't have to worry if their childcarer is sick or on holiday, as others can cover, etc..

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