Budget 2013: the new childcare support excludes families who most need help

In a time of austerity, why is extra money being directed towards families earning £300,000, and not those on universal credit?

The centrepiece of the budget will be a new system of tax-free childcare vouchers (deliberately misnamed tax relief by the government) for middle- and higher-income families.

Of the nearly £1bn earmarked for childcare, £750m is going towards these new vouchers. Over time they will replace existing employer-supported vouchers. As such, they are an improvement: they are available to all families not just those whose employers happen to offer the scheme.

Yet analysis by the Resolution Foundation shows that more than 80% of families that will benefit from this new support from 2015 are in the top half of the working-age household income distribution. They will be able to claim back 20% of their childcare costs up to £6,000 per child. In fact, even families with incomes up to £300,000 will be eligible for support.

Lowering the income cap to exclude more high-income families, however, would have freed up more money to invest in those on low and modest incomes who face the highest barriers to work because of childcare costs. The government maintains that it would have been administratively complex to exclude all but the richest families – those with one or more earners paying the top rate of tax. But it saw fit to create a new threshold to means-test child benefit.

The government’s decision to direct the bulk of new money towards the better off means that extra support will not be available for all families in receipt of universal credit. Those families where both parents earn enough to pay income tax – at least £10,000 in 2015 – will be able to claim 85% rather than 70% of their childcare costs, which is a major improvement in helping to always make work pay. However, the vast majority of families who are set to receive universal credit will miss out. These are lower-income families with one parent working full-time and another part-time, who will not be eligible for additional support.

As well as excluding some of the families who most need help the government is making childcare more complex. There will now be two levels of childcare support within universal credit. In addition there is the promised support for middle- and higher-income families. There is also a third funding stream which will remain unchanged by the budgetannouncement. This provides 15 hours of free, universal childcare for three- and four-year-olds. A new administrative system will be needed to ensure that parents can only claim support once for each child.

Moreover, the government has chosen to invest more money in demand-side funding mechanisms when all the evidence is that they do nothing to hold down prices. The cost of childcare has increased by 77% in real terms over the last decade, with annual increases far in excess of inflation. There is no guarantee that all of today’s new money will find its way to parents in the form of lower prices. Providers consistently report that they are underfunded and struggling to stay afloat. There is nothing to stop them raising prices to take advantage of the new funding.

A better option would have been to build on the current universal entitlement as proposed by the Commission on Living Standards. Providing an additional 10 hours of childcare at very low cost, say £1 an hour, would provide some support for all parents and allow more second earners to work part-time. However, it would not disproportionately skew the new investment towards the better off as the government’s proposal does. And by funding providers directly, government would be better able to control costs and ensure that new spending translates into cheaper childcare for parents.

Taking the nearly £1bn cost of the new proposals together with the £750m currently spent on the employer-supported voucher, the government could have funded an extension of the universal entitlement to almost 10 hours.

In a time of austerity, finding new money to invest in childcare is welcome and we should not overlook this. But it makes the decision to invest the majority of that new money in better off families who can more easily afford childcare all the harder to understand.

This post originally appeared on The Guardian