20 ways to make Britain better – Paying for childcare

Over the next twenty weeks, Nick Pecorelli will be outlining 20 ways to Make Britain better. Here’s his first, on how we can pay for childcare.

Reconciling the need for a compelling ‘retail offer’ with that for fiscal credibility in the eyes of the electorate provides Labour with perhaps its greatest electoral conundrum.  Without the right ‘retail offer’ Labour won’t stay in contention. But if every ‘retail offer’ is based on a new tax it will send a signal that Labour is ducking the tough choices. And stronger regulation can only deliver in certain circumstances and specific markets.

One area where Labour is navigating this challenge is childcare. The case for more support for childcare is clear enough. Unaffordable childcare means many young mothers, and some fathers, are locked out of the jobs market. Young mothers locked out of the jobs market means lower earnings for them and the wider economy.  Creating a virtuous cycle of investment in childcare and more opportunities for young mothers to remain connected to the labour market or work more hours makes total sense but the funding to do it decisively and comprehensively is elusive. Is there a way?

Our welfare state is centralised, inflexible and cash oriented. Child Benefit is a case in point. It has many virtues, not least that it is – or rather was – universal. But it could play a more potent role in a re-founded welfare state better suited to the modern labour market than when it was introduced in different guise, in 1946.

For a first child the benefit pays £20.50 a week (and £13.55 a week for subsequent children). Between birth and 16, this is just over of a total of £17,000. A young mother who stays out of the jobs market for more than a year or so will face a maternity penalty over their life time, often many times greater than this. What if part of what is currently paid weekly as child benefit could be drawn down and become a contribution towards childcare costs? What if central government and in certain cases local government also contributed to the pot and the funds were channeled directly to providers?

There are many potential advantages to this approach over the Conservatives’, which involves direct payments of 20% of childcare costs up to a maximum of £2,000 on incomes up to £150,000, per parent.

First and foremost it would be significantly more progressive. If the right to draw down a certain proportion of child benefit was matched by central spending based on income and additional local expenditure, even more so.

Second, by authorising local government to make payments direct to approved childcare providers this proposal would focus on building up childcare infrastructure. It therefore reduces the risk of merely driving up childcare costs, which is inherent in the Conservatives’ proposal.

Third, by explicitly asking recipients for some sacrifice of future Child Benefit, the approach is oriented around work. Parents will want to consider carefully the potential returns from earnings against the reduction in Child Benefit. This emphasis on work and responsibility should help play a part in rekindling trust in the welfare state. Moreover, it both enables Labour to invest more heavily in childcare in the early years than would otherwise be possible and potentially provides the political and financial space to commit to increases in Child Benefit. Perhaps it could also be renamed Childcare and Child Support Payments?

If the contribution from central government was subject to a national debate each year based on the increased revenue that accrues to government as more parents return to work earlier or work greater hours, this should help Labour make the case for childcare investment. The Office for Budgetary Responsibility could present annual analysis of the fiscal consequences of additional investment in childcare as a result of the policy and this could form the basis of the chancellor’s annual decision on matched contribution from central government.

Finally, if the financial framework for cities and local government automatically incentivised them to support people into work, or better paid work, they would become more willing to find resources for childcare, and to look at different options for supporting parents into work, including building up childcare networks and, in certain circumstances, offering tailored packages of direct financial support to family members and others who provide care for children.   And the state, nationally and locally, would begin to shift from performing a top down passive role to one where it acts as an enabler in an equal partnership with parents struggling to balance work and parenthood.