Welfare Four crucial questions raised by Government’s childcare reforms 7 January 2013 The government’s focus on childcare is welcome but the Resolution Foundation has serious concerns that the introduction of tax relief for childcare, as has been reported, will benefit those on higher incomes more than those for whom childcare costs present the greatest barriers to employment. Experience with employer supported childcare vouchers, which already offer tax relief for childcare, demonstrate that take up is highest among the top twenty percent of households. Key questions need to be answered: How will this approach benefit the lowest income families in work who pay no or very little tax? Will this new proposal on tax relief offer any gains to parents who currently claim the childcare element of working tax credit? The current employer supported childcare voucher offers little benefit to the typical family claiming tax credit support. How will any new support be funded? It seems unlikely that existing spending on childcare vouchers will be sufficient to cover the reported £2,000 tax-relief per child. If the required funding is taken from existing support targeted at low income families, this will leave those families significantly worse off and make the proposal even more regressive. Will the new tax relief provisions be channelled through theexisting employer supported voucher scheme? If so will this mean changing what is a voluntary scheme into a compulsory scheme that all employers will have to take part it, regardless of size? Or will the current employer voucher system be scrapped and a new system created in which childcare providers are expected to take on the administrative burden? Is greater investment in a demand-side measure such as tax relief the best way of constraining rising childcare prices faced by parents? The evidence suggests that demand-side investment in childcare is not the best way of keeping prices affordable. The Resolution Foundation is in favour of additional investment in childcare being focused on an extension of the current entitlement for two, three and four year olds from 15 hours a week for 38 weeks a year to 25 hours a week for 47 weeks a year. A fully funded proposal was set out in the Commission on Living Standards. This would provide strong support for second earners to work part-time when their children are young. Vidhya Alakeson, Deputy Chief Executive of the Resolution Foundation, said: “It is good that the government sees childcare as a priority for the rest of its time in office. However, the suggested proposal of supporting working families with the costs of childcare through tax relief investment looks likely to be regressive, offering the most support to affluent families and very little to the ‘strivers’ the government says it wants to support. These are the families who face the greatest struggles with today’s high costs of living, including childcare. Any new investment should focus on extending the number of hours universal childcare is available for young children, benefitting all families, including the poorest”. Notes A voluntary system of employer-supported childcare vouchers already offers basic rate tax relief. Parents whose employers offer the scheme can claim up to £55 a week free of tax and National Insurance for the costs of childcare. Participating employers have to offer vouchers to all employees to prevent the scheme being a perk for higher earners, with the exception of minimum wage employees who can be exempt.
