Childcare support and the hours trap

The Government’s funding of childcare under Universal Credit could shatter its commitment to make work pay, accordingly to new analysis commissioned by Gingerbread and the Resolution Foundation think tank. The changes, to be implemented from 2013, may leave some parents facing losing over 94p in the pound as they increase their working hours, damaging work incentives and meaning that the government will fail its own test on welfare reform (1).

Analysis of scenarios for childcare support under the new Universal Credit (2) show a particularly damaging picture for single parents and second earners in low to middle income families, effectively spelling the end of full time work:

• A single parent with one child earning the minimum wage would keep only 6p of every pound earned for every hour worked over 24 hours a week
• A second earner in a couple with two children on the living wage of £7.20 an hour would keep only 9p of every pound earned over 20 hours a week, and take home no extra cash at all from working beyond 30 hours a week

This means a single parent on the minimum wage would only have £7.50 a week more in her purse if she decided to work 2 full days a week rather than 1, and £3 more if she increased from 3 days to 4 days of work.

These findings fly in the face of the Government’s own commitments to make work pay for all parents (3), and will put the brake on aspirations for those who want to increase their working hours, which the Government claims to support (4).

Fiona Weir, Chief Executive of Gingerbread, said: “Government plans for childcare are a ticking time-bomb for welfare reform. Prime Minister David Cameron’s high profile pledge to single parents to make work pay will be broken unless the Treasury can find extra funding for childcare”.

Gavin Kelly, Chief Executive of the Resolution Foundation, said: “Further increases in childcare costs risk driving parents – especially mothers – on low-to-middle incomes out of full time work. Doing more than part-time work just wouldn’t make you better off. Living standards are already severely squeezed and this would be a further hammer-blow to working families”

The Universal Credit reforms will for the first time help parents working fewer than 16 hours to pay for childcare, but as the overall budget for childcare support within the credit is fixed, other working parents will lose out.

The Committee Stage of the Welfare Reform Bill to scrutinise the plans is due to end this week, and Iain Duncan Smith will be meeting MPs and stakeholders to discuss the Government’s options on Tuesday.

Notes to editors:

1. In his Foreword to the White Paper 21^st Century Welfare (November 2010), Iain Duncan Smith wrote: “At its heart, Universal Credit is very simple and will ensure that work always pays and is seen to pay. Universal Credit will mean that people will be consistently and transparently better off for each hour they work and every pound they earn.”

2. The DWP has said that it will maintain the current funding pot for childcare, but will extend eligibility to those working under 16 hours. Iain Duncan Smith said during the second reading of the Welfare Reform Bill: “We will invest at least the same amount of money in child care as in the current system, and we will aim to provide some support for those making their first moves into work, so that the support available is not restricted to those working more than 16 hours.” It is also expected that overall take-up of childcare support will be higher under the integrated Universal Credit system
3. Speaking at last year’s Conservative Party Conference, Prime Minister David Cameron said: “Remember last year? When you stood up to show how angry you were about the injustice of some low paid single mothers going out to work and losing 96p for every extra pound they earned? So to that single mother struggling and working her heart out for her children, we can now say: ‘We’re on your side; we’ll help you work; we will bring that injustice to an end’ ”.

4.  Minister Chris Grayling in the Committee debate on 5 April 2011 said “It is not our intention to force people into part-time work rather than full-time work….We believe that individuals should have choice in how to manage their working lives—and child care if they have reached that point. There is no conscious intent to push people from full-time to part-time employment. That would not be right. This is about supporting individual choice.”

5. Under the current system of Working Tax Credits, around 450,000 working households across the UK, mostly on household incomes below £30,000, claim support for childcare. Until the end of 2010/11 this support reimbursed 80% of childcare costs up to a maximum of £175 for one child and £300 for two or more children, per week. From April 2011 the rate of reimbursement fell to 70% of costs. The scenarios examined in today’s report model childcare support under the Universal Credit covering 70% of childcare costs up to maximum of £125 (1 child) and £215 (2 plus children) and 80% with limits of £100/£170.
6. Average childcare costs in the UK are currently £3.50 an hour and £4.75 in London (Daycare Trust, Childcare costs survey 2011).

Donald Hirsch, author of the report, is an independent consultant and writer on social policy and is Head of Income Studies for the Centre for Research in Social Policy at Loughborough University.

Gingerbread is the national charity working with and for single parents. We provide expert information and advice, along with membership and training opportunities, to single parents and their families, and campaign against poverty, disadvantage and stigma to promote fair and equal treatment and opportunity for them. www.gingerbread.org.uk

The Resolution Foundation is an independent research and policy organisation working to improve the lives of low-to-middle earners – a group that is below median income, but not heavily reliant on state support.  There are six million low-to-middle income households in Britain.  www.resolutionfoundation.org