Arguments in favour of government childcare support are often built on emotional pillars, pleading to one’s sense of righteousness – we should help parents with childcare because it is the fair thing to do, the nice thing to do. It is the fair and nice thing to do, but it is also the economically sensible thing to do. Given that the plea for righteousness has failed to get us very far – the UK has one of the highest childcare costs in the OECD – perhaps it is time to focus on what we all stand to gain should the situation improve.
The expansion of government childcare support being rolled out over 2024 is a step in the right direction, albeit an insufficient one. The expanded system of subsidised childcare will kick in at nine months on the basis that, prior to that, statutory maternity pay (SMP) is available. However, at a maximum of £172.48 per week after the first six weeks, many would struggle to cover their living costs on SMP alone.
Another policy feature which seems poorly thought out is that it excludes parents earning more than £100,000 per annum. The earnings threshold can lead to some odd and inefficient labour market incentives for those earning close to £100,000. For example, if you are offered a promotion which would take your salary from £99,000 to £105,000, you may actually be worse off financially once the out-of-pocket childcare expenses are considered.
It is also irrational that if you are in a couple, to qualify for the expanded funding, both of you must be earning at least £8,670, and neither of you can earn more than £100,000. This means that a couple whose joint annual earnings are £197,000, made up of one £98,000 salary and one £99,000, would qualify, but a couple earning £110,000 in total, made up of one £101,000 salary and one £9,000 salary, would not.
If the policy is to be means tested, there is also a question of how high the earnings threshold should be. The argument in favour of having an income ceiling at all is that workers earning above a certain amount can easily cover childcare costs. Hence, any government support would not influence outcomes and represent a deadweight loss.
However, the cost of childcare, especially in London, has become so high that even for higher earners it represents a significant outlay, especially at a time when both the tax burden and other costs of living have risen. Take, for example, a worker earning an annual salary of £100,000 and with a monthly post-tax take-home salary of £5,587. The typical cost for a full-time day nursery in inner London is £1,710 per month; this represents nearly a third (31%) of the take-home pay for a worker earning £100,000. This would make it almost financially reckless to have multiple children, which is a concern for the country’s outlook given the well-established economic benefits of maintaining a steady birth rate.
More generally, across the UK, net childcare costs for parents using childcare facilities represent 23% of net household income. This is well above the level in other large European economies – the comparable figure for France is 8% and 1% in Germany – which compete with the UK for top global talent.
The imposition of an earnings ceiling at the current level echoes a series of other recent policy changes, for example in the income taxation space, that are allegedly meant to target the very wealthy, but that more importantly hit working professionals across industries vital to the British economy.
For many internationally mobile professionals in their 20s, 30s and 40s, developments such as frozen income tax thresholds, a weaker pound, higher housing costs, and ailing healthcare and education provisions have already made the UK a less attractive place to build a life and a career. As they consider starting a family, the UK’s ungenerous childcare offering may be a final nudge, pushing them across the Channel or further abroad.
Therefore, far from a deadweight loss, a more generous childcare system would be a meaningful step towards helping families struggling with rising living costs, but also a strategic move which may help the UK regain some of its former glory in terms of attractiveness to global talent, and therefore global business. Moreover, it is something that could benefit us all via an improved growth and fiscal outlook.
This note was originally published by Comment Central (available here).
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