David Cameron's great childcare con

This isn’t just bad news for parents and children, it’s bad news for the economy too, says Sharon Hodgson.

Today’s coverage of David Cameron’s childcare policies has illustrated how out of touch this Government is. While they give tax cuts to those at the top, they have totally failed to support hardworking families with the cost of childcare.

As one mother, who works from home as a childminder, put it: “I remain unconvinced that it does anything for the typical working/lower middle class family”.

She is right. According to the Resolution Foundation think tank, 900,000 low income working families will not benefit from David Cameron’s childcare vouchers.

And of course no-one will get any help until 2015. There has been nothing for families in five years from this Government, while costs continue to rise and wages stagnate. And of course when it comes to living standards, hardworking parents have already seen their family budgets squeezed.

Working parents with two children have already lost £1,500 a year from the cut in childcare tax credits. Added to that, many mums have lost hundreds of pounds because of cuts to maternity pay, child benefit and pregnancy grants.

By the next election, George Osborne will have taken a total of £15 billion out of parents’ pockets.

All this is happening while costs continue to spiral. Childcare costs are rising faster than wages. A parent buying 50 hours of childcare per week for a child under two now faces an annual bill of nearly £11,000 per year or £14,000 per year in London. That’s the equivalent of a second mortgage.

And yet provision is getting patchier. Unbelievably, there are now 5,000 fewer childcare places since last year, as nurseries close down and childminders go out of business.

And many nurseries and children’s centres are charging top up fees for services that used to be free, pricing yet more hardworking families out of the labour market.

This isn’t just bad news for parents and children, it’s bad news for the economy too.

Labour want to ensure parents are able to go back to work if they want to. That’s why we’re looking to countries in Scandinavia who provide stronger support for childcare and where female unemployment is lower.

But this Government has made it more difficult for new mums to return to their job.

An Aviva survey found that 32,000 women left the workforce in one year since summer 2010 due to high costs of childcare making it more cost-effective to stay at home.

The summer holidays are a particularly tricky time for working parents. Those who can’t afford a private nanny or nursery are often forced to take time off work or rely on help from friends or families.

Labour was working to address this in Government. We tripled the number of holiday childcare places, but in their first year this Government cut 10,000 of those places, and have slashed the budget for holiday childcare by 40% so far.

There’s no doubt that childcare costs are one of the biggest drivers of living standards. The trouble is that hardworking parents have seen their income squeezed since the last election.

Only David Cameron could be so out of touch to think parents will be grateful for some help in 2015, when they’ve already seen their childcare support cut.

Sharon Hodgson MP is Labour’s Shadow Children’s Minister

David Cameron visits a school. Photo: Getty
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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.