Economics, politics and the reality of the 'squeezed middle'

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The politics of childcare are heating up. Here's why.

All parties are desperate for measures that will make life easier for hard-pressed families. Affordable childcare is an obvious candidate.

Children playing

Often an issue only gets the attention it deserves due to a shift in the wider political context.  And so it may be with our creaking childcare system. Despite unprecedented increases in public support – and major improvements - it’s still the case that during the Labour years childcare never received anything like the concerted attention going to schools and hospitals.  Even now when surveys come out showing the cost of childcare racing ahead of inflation (never mind wages), they tend to be buried deep inside newspapers while increases in rail fares or petrol prices are splashed across the front pages. In political and media terms childcare has long been seen as a second-tier issue.

This may, however, be changing. Part of the reason is straight politics. None of the parties like what they are hearing in focus groups about the absence of ideas that would make a concrete difference to living standards. Labour still has a long way to go to recover the ground it lost with working families – particularly among modest earning women: recall that at the last election the Conservatives had a massive 16 point lead over Labour among C2 female voters, reversing Labour's towering 18 point advantage among the same group in 1997. Meanwhile Conservative strategists are fearful that their current strategy of appealing to so-called strivers (even while reducing their tax credits) by making a big play of bearing down on other less deserving groups, may at some point run out of road. Prior to the next election it may be met with the obvious retort from the working population: ok, but what have you actually done to improve my plight? That’s a question they don’t want to be asked. For their part, the Lib Dems remain frustrated that their efforts to lead the debate on expanding early years provision has gone almost entirely unnoticed – in part because it hasn’t been connected to an account of making it easier for families to combine work and home.

Of course, there is no single remedy to the multiple causes of the squeeze on living standards – and improved childcare is a very long way off being a panacea. It will be by no means universally popular. The great majority of voters don’t have young children. Some people vehemently resent more support for those with kids. Others will say that families should have someone at home.  

But the costs of inaction – both economic as well as political – are mounting. It’s fairly well known that childcare costs in the UK are very high and account for a large chunk of family incomes. (It’s less widely understood that for many families there has actually been a fall in the share of their incomes spent on childcare  – though that trend has been impeded by the recent cut in tax credit support for childcare costs, as the chart below shows).

Childcare costs as a % of after-tax income

Source: OECD, and Resolution Foundation childcare cost model, 2012. Childcare costs for family with two children aged two and three in full-time care, as a % of net family income, in 2008 and 2012. Black horizontal lines on the pink bars show what 2012 levels would have been had childcare support through tax credits remained at 80% rather than being cut to 70% in April 2011.

These costs weigh very heavily in the decision a couple takes as to whether to be dual or single earning. Indeed, in the context of falling real wages the only way many families will be able to protect, never mind enhance, their living standards is to work more hours. Obviously that’s no easy task given record levels of under-employment.  But let’s just assume that extra hours are available, and consider whether or not families would be better off from the second earner taking them given the costs of childcare.

Worth working? The impact of childcare costs

The chart sets this out for a stylised, typical middle income family with two young children. It assumes the first earner, the man, works full-time and the second earner, the woman, is deciding how many hours of work to undertake (apologies for the gender stereotypes, but it still reflects the norm).

It is a chart that politicians should pause over. There is some incentive for the woman to work for about 13 hours at which point the family is £4,500 better off a year than if she stayed at home. Beyond this further hours of work actually make the family worse off as the cost of childcare, and the withdrawal of tax-credit support, outweigh the post- tax gains from higher earnings. (This chart would look even bleaker if it was a for a low income working family with each earner on the minimum wage: they would only be a measly £300 better off a year if the second earner works 25 hours per week, and after this more hours of work makes them worse off).

What should we take from this?

The first point concerns how this problem is interpreted by different parts of the political spectrum. It says something about today’s politics that some on the Tory right (in contrast to a few modernising Conservatives) react to it by saying that the trouble is too much state involvement, and the answer is to liberate families by ending direct childcare support replacing it with tax allowances for those with children.  It’s hard to know where to start on this: for many low and middle income families the cost of childcare is so much greater than any plausible increase in tax allowances that this would  without  doubt consign the second earner, overwhelmingly the woman, to staying at home (leading to an immediate hit to living standards and a permanent loss in earnings potential); lots of those who are low paid and work part-time don’t pay any income tax so would gain zilch from these tax allowances; and in any case many low income working households would see the majority of the gains from tax allowances immediately withdrawn under Universal Credit. The list goes on.

A more reasonable interpretation is that, despite the progress made since the early 2000s, our childcare system still falls far short of the type of support that would enable many working families to hold down two jobs. If Britain is to make strides in catching up with leading advanced economies in terms of female employment (never mind shifting gender roles) that urgently needs to be remedied. And if we care about childcare quality then one way or another it will mean spending more. We’re not going to deregulate our way to Scandinavia.

Second, and perhaps equally challenging for both left and right, is that relying heavily on a means-tested approach to supporting childcare has severe limitations. It necessarily results in punishing marginal tax rates for those on modest and middle incomes, as tax-credits get withdrawn.  So whilst for the foreseeable future there will be of course be a role for means-testing, any new support should be broadly shared rather than highly targeted.    

Third, none of this is revelatory. It’s known to leading people across the political parties. To varying degrees, they are already concerned about this issue. All are anxious that their showy empathy on family living standards is increasingly grating with a weary electorate. All are uneasy about their lack of cut-through policies particularly for working families. All nervously wonder whether another party may make the first move on this terrain, and if so how they would fund it in the context of austerity.  

True, it would be foolhardy to predict an upward bidding war on childcare given the sweeping scale of the cuts to come. But only a fool would think the best course of action is to stick with the current half-formed system of childcare when the case for building on it – not least in terms of employment - has never been stronger. Expect childcare to feature in 2015 like never before.