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

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What does the childcare announcement really tell us?

By prioritising support for dual-earner couples, the coalition is shunning backbench Tory calls to favour the 'traditional' family.

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

Before we rush to dissect the government’s new childcare policy it is worth pausing to reflect on the very fact that in an unprecedented time of austerity a Conservative-led administration is proposing to spend near on £1bn on childcare. There are all sorts of caveats and problems with the policy, when it will be introduced and how it will be paid for. But before we rush into all that we should note that today’s announcement confirms that the issue of childcare will remain at the centre of the political arena.

There has already been plenty of unpicking of the proposals. But there are several aspects of what has been announced that say something significant about the policy and politics of the coalition that need to be drawn out.

First, there is the issue of who benefits. When highly constrained governments decide to spend new money, the issue of who gains the most provides an unusual moment of clarity about its distributional priorities. Choosing to spend the bulk of the new resource (£750m out of £950m) on a policy that excludes those on tax credits is very significant (bear in those on tax credits do already get support – see below). It rules out a lot people from the headline announcement. Indeed not many commentators are aware of how many people won’t access the new voucher policy because not many people realise how far up the income ladder universal credit reaches for working families relying on childcare (there is a hazy notion that UC is about the 'poor' when it actually reaches many households on middle incomes relying on childcare). A couple with two children in childcare would have to be on more than £40k of post-tax income before they come off universal credit (the figure is significantly higher if they are renting rather than home-owners). That is above the middle of the working-age income distribution. Those who have highly misleadingly referred to the vouchers policy as being ‘universal’ need to change their language.

Second, the announcement confirms something important about the type of family that the coalition is prioritising. As with all governments, it’s best to ignore the words that ministers are using and instead focus on the deeds. Child Benefit was means-tested in a way that helped dual earning families far more than single earning couples – much to the chagrin of Conservative backbenchers. The childcare announcement further ups the ante: not a penny of the £1bn of extra spending will benefit a couple where one parent stays at home. What’s more, some of the future spending will be paid for by ending the eligibility of single earner couples to vouchers (though existing claimants will be protected): to the extent there is a clear group of ‘losers’ it is single earner families wanting to claim vouchers in 2015 and beyond. And bear in mind this is happening at a time when the revealed preference of the Conservative leadership is to determinedly ignore its manifesto commitment to a married couples’ allowance, shunning calls to support the ‘traditional’ family. Whether you like or loathe this direction of travel (and I’ve long called for new support to be geared towards dual earners) it is pretty stark and reveals a willingness to ignore the sentiment of a large swathe of influential backbench support who feel ideologically disoriented (to put it politely) by these choices. This strategy on the family also hardly fits with the characterisation - popular among some centre-left critics of the Conservative leadership – that it is now largely captured by backbencher sentiment.

Third, today’s announcement included a significant, highly welcome, and largely unnoticed U-turn. One of the first cuts the coalition made was to the support on offer to low and middle income families for childcare via working tax credit. It was reduced from 80% to 70%. Privately some senior Lib Dems bitterly regret this decision (and their lack of scrutiny of it at the time). Following today’s announcement some of those on Universal Credit will be eligible for 85% of their childcare costs. This is a partial correction of an early mistake and should be welcomed as such.

It is, however, only a partial correction as from 2015 there will be a two-tier system of support for childcare within Universal Credit (bear with me). Depending on the level of family earnings, support for childcare costs will either be set at 85% or 70% - to be eligible for the higher rate both adults need to earn more than the (rapidly rising) personal tax allowance. This means a couple or lone parent with someone on the minimum wage working fewer than roughly 30 hours will miss out on the more generous level of support. ( It’s also striking that the new policy re-introduces cliff-edges to the tax credit system of the type that existed during the Labour years that Universal Credit was supposed to be getting rid of). I’ve yet to hear anyone even begin to justify how excluding these struggling part-time workers can be right when families with two children on a household income of up to £300k are set to receive a generous payment of £2.4k per year.

Fourth, this is a very fiddly announcement – and the fiddliness has important consequences. At a time when there is a lot of interest and potential support for simplifying childcare funding, today’s announcement - should it become policy beyond 2015 – cements three different childcare funding regimes: more generous tax-break vouchers for middle and higher income parents; and (for some) more generous tax-credits; as well as an entitlement to free childcare hours for 2, 3 and 4 year olds. As a result, the future politics of trying to pool spending on childcare in order to move towards a single, universal, supply-side funded system of childcare provision has just got harder.

Fifth, and related to this complexity, the announcement continues the awkward evolution of our tax system from one based solely around individuals to one which increasingly takes into account the earnings of partners. In addition to the highly clumsy system of means-testing introduced via the child benefit reforms, we will now need new systems for assessing childcare support entailing a joint assessment of earners in a household. Do they both earn enough to pay income tax in the case of universal credit? And do either of them earn enough to pay the 45% rate of tax in the case of the childcare voucher? Our tax and benefit systems continue to bump into each other.

Whatever you make of today’s announcement we can be sure that childcare is an issue which will run all the way to the next election (and quite possibly beyond). Labour’s response will be keenly awaited. It will certainly need one. The government’s announcement has in no way settled the childcare problem but it has signalled the start of the argument about how to solve it.