The coalition risks following the wrong path on childcare reform

Global experience shows that increasing subsidies to parents, rather than investing in services directly, is a costly and ineffective approach.

As part of next week’s Budget, the Chancellor is expected to announce reforms to the funding of childcare. While action on childcare is welcome, it is likely the changes will see a greater proportion of childcare funding flowing via parents to purchase childcare, rather than invested in services free at the point of use. The experience of other countries with a similar market-led system is that rather than leading to cheaper care, pumping more money into the market via parents leads to greater cost inflation, with little change in affordability. If the government really wants to go big on childcare, it should invest more money in services, rather than benefits.

What is going to be announced? Since the 're-launch' of the coalition in January, there have been numerous hints in the media. Despite widely-reported disagreement between the coalition partners, it appears the government has settled on offering greater funding to better-off parents via some kind of tax relief, combined with additional money tied to Universal Credit for poorer families. Beyond the previously-announced extension of the free Early Years Entitlement to the 40 per cent of poorest two-year olds, there is little sign that the coalition is looking to expand the free offer, preferring instead to give money to parents.

While it is good that the government is looking at greater childcare funding, we have to ask whether this is the best use of extremely scarce resources. The coalition hopes that putting more money in the hands of parents will lead to greater purchasing power in the market for childcare, with increased competition and innovation among providers acting to keep prices low and stable. But will this actually be the case?

In order to answer that question, we should look to the country that has been most committed to this style of funding. Australia enacted wide-reaching reforms to childcare over the last two decades, combining a mixture of de-regulation and increases in childcare benefits, whilst at the same time effectively shutting off direct funding to childcare providers.

What happened to prices? The Australian Bureau of Statistics collects robust inflation data on the cost of childcare. Looking at how prices evolved before and after the reforms provides a stark picture of the dangers attached to the changes being considered here in the UK.

In the ten years before the 1997 reforms, the price of childcare rose on average by 5.2 per cent a year, around a fifth higher than the general rate of inflation. But in the decade after 1997 relative cost inflation rocketed, with childcare prices rising by 7.2 per cent annually, more than two and a half times wider inflation. In 2008, rather than reverse course, the Australian government doubled down on their inflationary approach, increasing the value of the tax rebate offered to families. If anything it appears this worsened childcare costs – In the year to March 2012 prices rose by almost 10 per cent.

What is it about childcare that leads to this outcome? Why doesn’t parental purchasing power manage to keep costs low? Simply put, the market for childcare does not function like most competitive markets. It is inherently localised, risky for those looking to set up a business and vulnerable to severe cost pressures from staff outlays and rent inflation. Like many other public goods, it is better to let the state pool these risks and offer long-term and sustainable funding to keep costs low, rather than leave it to the market.

Will this experience be repeated here in the UK? All the signs are that the UK, which already has internationally high childcare prices, is set for further inflationary pressure. The sector in general is unprofitable, with a quarter of childminders operating at a loss last year, meaning prices may need to rise just to keep many businesses afloat. And surveys of the UK market suggest that the qualifications profile of staff in the sector has risen in recent years, but with little change in real wages. Having a higher-skilled workforce in the sector is welcome, but is likely to exert cost pressures in the near-term. All this will be compounded by the changes that will be made next week.

Throwing more money into a system that is struggling to stay afloat, as the coalition is planning to do, may look good on paper, but without controls on prices there is a real risk that the instant benefit families feel after next weeks changes will soon be eroded by price rises. Providers will see their existing set of users have a greater ability to pay, and, because of the difficulty of turning a profit in the sector, will understandably look to raise prices. Far from being a gold rush for the sector, these changes are more likely to re-enforce the status quo. At a time when there is little money around, this risks being a highly wasteful use of public resources.

What the childcare sector and parents really needs is higher and more sustainable funding for providers, with a greater number of hours offered free or at low cost to parents. It would be wrong to claim this comes cheap. Indeed, countries that have followed such a route, like Denmark and Sweden, tend to spend a larger proportion of GDP on childcare and early years provision. But by controlling the cost to parents directly, and offering a longer-term and more predictable source of funding to providers, there are real efficiency gains to be made under such a system.

All three main political parties realise the importance of childcare, and accept there is a role for the public sector in making it affordable. This is welcome. But how we go about funding childcare, either via parents or through providers and price controls, needs to be rigorously debated. We currently have a mixed system in the UK, with some free places through the Early Years Entitlement and some subsidies via the benefits system. It appears the coalition favours the latter. It is important that we realise the dangers of such an approach, and look towards a much more sustainable future for UK childcare.

David Cameron is pictured during a visit to a London Early Years Foundation nursery in London. Photograph: Getty Images.

Spencer Thompson is economic analyst at IPPR

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The Tories' aim is to put Labour out of business for good

Rather than merely winning again, the Conservatives are seeking to inflict permanent damage on the opposition. 

The Conservatives are numerically weak but politically strong – that is the peculiarity of their position. Their majority is the smallest of any single-party government since October 1974. Yet, to MPs at the Tory conference in Manchester, it felt like “2001 in reverse”: the year of Tony Blair’s second election victory. Then, as now, the opposition responded to defeat by selecting a leader, Iain Duncan Smith, who was immediately derided as unelectable. Just as Labour knew then that it would win in 2005, so the Conservatives believe that they have been gifted victory in 2020. David Cameron has predicted that the party’s vote share could rise from 37 per cent to a Thatcherite 43 per cent.

For Cameron and George Osborne, who entered parliament in 2001, this moment is revenge for New Labour’s electoral hegemony. They believe that by applying Blair’s lessons better than his internal successors, they can emulate his achievements. The former Labour prime minister once spoke of his party as “the political wing of the British people”. In Manchester, Cameron and Osborne displayed similarly imperial ambitions. They regard Jeremy Corbyn’s election as a chance to realign the political landscape permanently.

Seen from one perspective, the Tories underperformed on 7 May. They consistently led by roughly 20 points on the defining issues of the economy and leadership but defeated Labour by just 6.5 overall. It was their enduring reputation as the party of the plutocracy that produced this disparity. Those who voted for Labour in spite of their doubts about Ed Miliband and the party’s economic competence may not be similarly forgiving of Corbyn. To maximise their gains, however, the Tories need to minimise their weaknesses, rather than merely exploit Labour’s.

This process began at conference. At a dinner organised by the modernising group the Good Right, Duncan Smith, Michael Gove and the Scottish Tory leader, Ruth Davidson, affirmed their belief that, contrary to Thatcherite orthodoxy, inequality is a problem. Only the Business Secretary, Sajid Javid, an admirer of the libertarian heroine Ayn Rand, insisted that equality of opportunity was the defining metric.

George Osborne’s assured speech was most notable for his sustained appeal to Labour voters. Several opposition MPs told me how unsettled they were by the Chancellor’s declaration that Labour’s new leadership calls “anyone who believes in strong national defence, a market economy and the country living within its means” a Tory. He added, “It’s our job to make sure they’re absolutely right. Because we’re now the party of work, the only true party of labour.” The shadow minister Jonathan Reynolds told me: “We’ve got to be extremely clear that this is not business as usual. This is a real attempt by the Tories to put us out of business – possibly for ever.”

The Conservatives’ aim is to contaminate Labour to the point where, even if Jeremy Corbyn were deposed, the toxin would endure. For those opposition MPs who emphasise being a government-in-waiting, rather than a protest movement, the contrast between the high politics of the Tory conference and Corbyn’s rally appearance in Manchester was painfully sharp. They fear guilt by association with the demonstrators who spat at and abused journalists and Tory delegates. The declaration by a rally speaker, Terry Pullinger, the deputy general secretary of the Communication Workers Union, that Corbyn’s election “almost makes you want to celebrate the fact that Labour lost” was regarded as confirmation that some on the left merely desire to run the party, not the country.

But few Tory MPs I spoke to greeted Corbyn’s victory with simple jubilation. “It’s a great shame, what’s happened to Labour,” one said. “We need a credible opposition.” In the absence of this, some fear the Conservatives’ self-destructive tendencies will reassert themselves. The forthcoming EU referendum and leadership contest are rich in cannibalistic potential. Tories spoke forebodingly of the inevitable schism between European Inners and Outers. As the Scottish experience demonstrated, referendums are almost never definitive. In the event of a close result, the party’s anti-EU wing will swiftly identify grounds for a second vote.

Several cabinet ministers, however, spoke of their confidence in Cameron’s ability to navigate the rapids of the referendum and his pre-announced departure. “More than ever, he’s the right man for these times,” one told me. By this December, Cameron will have led his party for ten years, a reign exceeded in recent history only by Stanley Baldwin, Winston Churchill and Margaret Thatcher. That the Conservatives have so far avoided cataclysm is an underappreciated achievement.

Yet there are landmines ahead. An increasing number of MPs fear that the planned cuts to tax credits could be a foul-up comparable to Gordon Brown’s abolition of the 10p tax rate. Despite the appeals of Boris Johnson and the Sun, Cameron and Osborne have signalled that there will be no backtracking. At such moments of reflection, the Tories console themselves with the belief that, although voters may use Corbyn as a receptacle for protest (as they did Michael Foot, Neil Kinnock and Ed Miliband), they will not elect him. They also acknowledge that the current Labour leader may not be their opponent in 2020. The former paratrooper Dan Jarvis is most often cited as the successor they fear. As with Cameron and Blair, his relative lack of ideological definition may prove to be a strength, one MP suggested.

William Hague is fond of joking that the Tories have only two modes: panic and complacency. If the danger before the general election was of the former, the danger now is of the latter. 

George Eaton is political editor of the New Statesman.