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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Tony Blair might be a toxic figure - but his influence endures

Politicians at home and abroad are borrowing from the former prime minister's playbook. 

On 24 May at Methodist Central Hall, Westminster, a short distance from where he once governed, Tony Blair resurfaced for a public discussion. Having arrived on an overnight flight, he looked drawn and puffy-eyed but soon warmed to his theme: a robust defence of liberal globalisation. He admitted, however, to bafflement at recent events in the world. "I thought I was pretty good at politics. But I look at politics today and I’m not sure I understand it."

Blair lost power in the summer of 2007. In the ensuing nine years, he lost reputation. His business ventures and alliances with autocrats have made him a pariah among both the public and his party. A YouGov poll published last year found that 61 per cent of voters regarded Blair as an electoral liability, while just 14 per cent viewed him as an asset. In contrast, John Major, whom he defeated by a landslide in 1997, had a neutral net rating of zero. It is ever harder to recall that Blair won not one general election (he is the only living Labour leader to have done so) but three.

His standing is likely to diminish further when the Iraq inquiry report is published on 6 July. Advance leaks to the Sunday Times suggest that he will be censured for allegedly guaranteeing British military support to the US a year before the invasion. Few minds on either side will be changed by the 2.6 million-word document. Yet its publication will help enshrine Iraq as the defining feature of a legacy that also includes the minimum wage, tax credits, Sure Start, devolution and civil partnerships.

Former leaders can ordinarily rely on their parties to act as a last line of defence. In Blair’s case, however, much of the greatest opprobrium comes from his own side. Jeremy Corbyn inclines to the view that Iraq was not merely a blunder but a crime. In last year’s Labour leadership election, Liz Kendall, the most Blair-esque candidate, was rewarded with 4.5 per cent of the vote. The former prime minister’s imprimatur has become the political equivalent of the black spot.

Yet outside of the Labour leadership, Blairism endures in notable and often surprising forms. Sadiq Khan won the party’s London mayoral selection by running to the left of Tessa Jowell, one of Tony Blair’s closest allies. But his successful campaign against Zac Goldsmith drew lessons from Blair’s election triumphs. Khan relentlessly presented himself as “pro-business” and reached out beyond Labour’s core vote. After his victory, he was liberated to use the B-word, contrasting what “Tony Blair did [in opposition]” with Corbyn’s approach.

In their defence of the UK’s EU membership, David Cameron and George Osborne have deployed arguments once advanced by New Labour. The strategically minded Chancellor has forged an unlikely friendship with his former nemesis Peter Mandelson. In the domestic sphere, through equal marriage, the National Living Wage and the 0.7 per cent overseas aid target, the Conservatives have built on, rather than dismantled, significant Labour achievements."They just swallowed the entire manual," Mandelson declared at a recent King’s College seminar. "They didn’t just read the executive summary, they are following the whole thing to the letter."

Among SNP supporters, "Blairite" is the pejorative of choice. But the parallels between their party and New Labour are more suggestive than they would wish. Like Blair, Alex Salmond and Nicola Sturgeon have avoided income tax rises in order to retain the support of middle-class Scottish conservatives. In a speech last August on education, Sturgeon echoed the Blairite mantra that "what matters is what works".

Beyond British shores, political leaders are similarly inspired by Blair – and less reticent about acknowledging as much. Matteo Renzi, the 41-year-old centre-left Italian prime minister, is a long-standing admirer. "I adore one of his sayings,” he remarked in 2013. “I love all the traditions of my party, except one: that of losing elections."

In France, the reform-minded prime minister, Manuel Valls, and the minister of economy, Emmanuel Macron, are also self-described Blairites. Macron, who in April launched his own political movement, En Marche!, will shortly decide whether to challenge for the presidency next year. When he was compared to Blair by the TV presenter Andrew Marr, his response reflected the former prime minister’s diminished domestic reputation: “I don’t know if, in your mouth, that is a promise or a threat.”

The continuing attraction of Blair’s “third way” to European politicians reflects the failure of the project’s social-democratic critics to construct an alternative. Those who have sought to do so have struggled both in office (François Hollande) and out of it (Ed Miliband). The left is increasingly polarised between reformers and radicals (Corbyn, Syriza, Podemos), with those in between straining for relevance.

Despite his long absences from Britain, Blair’s friends say that he remains immersed in the intricacies of Labour politics. He has privately warned MPs that any attempt to keep Corbyn off the ballot in the event of a leadership challenge would be overruled by the National Executive Committee. At Methodist Central Hall, he said of Corbyn’s supporters: “It’s clear they can take over a political party. What’s not clear to me is whether they can take over a country.”

It was Blair’s insufficient devotion to the former task that enabled the revival of the left. As Alastair Campbell recently acknowledged: “We failed to develop talent, failed to cement organisational and cultural change in the party and failed to secure our legacy.” Rather than effecting a permanent realignment, as the right of the party hoped and the left feared, New Labour failed to outlive its creators.

It instead endures in a fragmented form as politicians at home and abroad co-opt its defining features: its pro-business pragmatism, its big-tent electoralism, its presentational nous. Some of Corbyn’s ­allies privately fear that Labour will one day re-embrace Blairism. But its new adherents would never dare to use that name.

George Eaton is political editor of the New Statesman.

This article first appeared in the 26 May 2016 issue of the New Statesman, The Brexit odd squad