Mike Brewer from the Institute for Fiscal Studies published a cogent note on Tuesday about the UK government’s “tax-free” childcare. It echoes some of the points I tried to make yesterday about the changes, namely that they are broadly sensible but there is no firm evidence to say that they will do what they are supposed to do, i.e., increase the number of parents in work. There is a big risk that simply subsidising demand will translate into higher sticker costs for parents since the supply side of the market is not working as one would hope of a competitive sector. This is without getting to the argument of whether we should think of nurseries as a market in the first place.

But Mr Brewer makes another important point. A household is eligible for tax-free childcare if the parent(s) are both working and neither receive financial support through working tax credits, or in the future, Universal Credit. What do you need to do to be classified as “working” and therefore ensure that your family gets up to £2,000 in support for childcare? You need to self-certify that you earn £50 per week. No income tax or national insurance is paid at this rate, so it would be hard for HMRC to check. “There will also be a very large incentive for some second earners to claim that they are earning that much: it could be worth thousands of pounds in childcare subsidy”, Mr Brewer writes.  Read more

The previous post looked at the changes announced on Tuesday to “childcare accounts”, a subsidy to working parents to help pay for nursery and/or childminders. But for lower income parents, there was a more important change announced regarding Universal Credit, the government’s all-singing, all-dancing, not-yet-working reform to the benefits system, due to be rolled out at some point in the next few years.

Most of the coverage on the childcare changes has focused on the subsidy. But the Universal Credit changes are important and they affect a lot of people: about one half of all households with dependent children will receive UC.

The childcare fix announced today suggests how, in a complex system where rates are being changed from year to year, such disincentives can still emerge. The change sounds simple: under UC, the government will now pay for up to 85 per cent of childcare costs, rather than 70 per cent, as previously proposed. This is why it was necessary:

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This chart shows why affordable childcare matters:

On Tuesday, the government announced tweaks to the childcare policies it introduced at last year’s Budget. It says that these changes will help parents with childcare costs and therefore support those wishing to return to work. Will they? Read more