Written evidence from Women's Budget Group (UCC0014)

The UK Women’s Budget Group (WBG) is an independent network of leading academic researchers, policy experts and campaigners that analyses the gendered impact of economic policy on different groups of women and men and promotes alternative policies for a gender equal economy.  We welcome the opportunity to provide evidence to this inquiry.

Summary

1. High quality, accessible and affordable early childhood education and care is essential social infrastructure, with the potential to deliver significant levelling up benefits for the children, families, the economy and wider society.

2. High-quality childcare between the ages of 0 to 5 years helps to close the attainment gap between low-income children and their more advantaged peers, reducing inequalities and creating benefits that last throughout a child's time in school and beyond[1]. It removes barriers to employment, particularly for women, who are still disproportionately responsible for unpaid care

3. Unaffordable upfront costs of childcare have a big impact on low-income parents whose childcare providers require them to make payments in advance. For the most part, it is mothers who are most impacted by this, as it is women who have their ability to work or work more hours inhibited by the high cost of childcare[2].

1. What is the impact of having to pay for childcare upfront under Universal Credit on parents’ decisions to work, or to work more hours?

• Under universal credit any support with childcare is paid retrospectively despite the fact that the majority of childcare providers require payment for the month or term upfront.

• Currently 52% of people on Universal Credit are women[3]. In March 2021, 962,000 single mothers were universal credit claimants, with 45% of them in work[4]. According to ONS data,  single mothers made up just 3.5% of the UK population but constitute around 16% of universal credit claimants[5].

• Mothers in paid work in the UK spend a significant proportion of their earnings on childcare. A survey by Coram Family and Childcare costs reported that the average price of a part-time childcare place (25 hours) a week for a child under two in a nursery was £137.69 across Great Britain, amounting to £7,160 a year[6]. The survey also shows there are substantial regional variations across Great Britain. England has the highest cost for both nurseries and childminders[7].

• Work by WBG using Coram’s data showed that in Great Britain, a woman whose median annual earnings were £11,324, had 63% of her wages  absorbed by childcare costs if she had a child under 2 in nursery part-time[8].  For  a woman whose median annual earnings were £28, 021, 49% of her salary as absorbed by the costs of having a child under 2 in full-time nursery[9].

• Some families will be able to receive support with childcare costs through Universal Credit or Tax Credits. However, for most families the cost of childcare will exceed the support that is available. Coram reports that in 9% of local authorities, the maximum limit per child under Universal Credit of £175 per week does not cover even a part-time place in childcare for a child under two[10]. This figure goes up to 99% of local authorities for a full-time place. If the costs of a family’s childcare exceed these maximum limits, they will not receive any additional financial support to cover these costs. This can mean that they pay more in childcare costs than they are earning, and so are worse off financially for working more hours[11].

• If women are in a situation where it does not make economic sense for them to work if they have a child, then they are much less likely to enter or remain in the labour market. The percentage of women who do not work because of looking after the family or home remains the single biggest reason why women are economically inactive (26.2%)[12].

• Although childcare costs should be treated as a household expense, evidence suggests that mothers tend to pay for childcare from their own incomes and childcare decisions within families are weighed against women’s salaries and whether it is financially ‘worth it’ for the mother to remain in the labour market[13].

• UC is tapered as earnings rise, which means reduced gains to employment or increased number of hours worked, since families will be faced with higher childcare costs not covered by UC. The disincentives are particularly strong for ‘second earners’ – mostly women – who also face employment disincentives due to a single work allowance for the couple before tapering of UC starts[14].

2. What is the impact on claimants of the monthly maximum reimbursement cap on childcare costs in Universal Credit, and the 85% cap?

• The amount of support available is capped at £175 a week, a level which has not changed since April 2016. This cap needs to be uprated to reflect the current cost of childcare.

• Although parents on a low-income can claim 85% of childcare costs, this still leaves them with 15% of the costs to pay, reducing the benefits of working or increasing their hours. As stated above, it is usually the ‘second earner’, the mother, whose work is impacted by a lack of affordable childcare. The 85% cap needs to be extended.

• The provision of support for 85% of childcare costs is undermined by the requirement for parents to pay childcare fees first and then claim the cost back. For many low-income families these costs are too large to be paid in advance and increases both barriers to work and the risk of debt.

• Parents can find themselves getting into debt with their childcare providers, putting the child’s place at risk. For some children, particularly those at-risk the loss of a place can have significant impact on the child’s development and wellbeing. Childcare can result in mothers decreasing their working hours in order to lower their childcare costs to an affordable level. This, in turn, reduces opportunities for in-work progression and prevents mothers from increasing their earnings.

• The government has extended the length of time parents have to claim back childcare payments to two months, however this does nothing to remove the barriers for families who struggle to afford up-front payments out of extremely stretched budgets.

3. What effect do the existing caps have on childcare providers and the availability of childcare?

• One of the most significant caps on childcare funding is the Early Years National Funding Formula. This is the mechanism through which central government allocates money to local authorities to pay providers for the 15- and 30-hours free entitlement for three- and four-year-olds. Analysis by the Early Years Alliance shows that the funding rates paid to local authorities for the free childcare offer are in some cases just two thirds of what the UK Government itself estimated would be needed to fully meet the costs of this care[15].

• In 2019, the cost of providing education and care for under-twos was underfunded by 37%, and for three and four-year-olds it was underfunded by 20%[16]. This amounts to a funding deficit of £662 million for the childcare sector in 2019/2020[17]. This underfunding has driven up the cost of parent-paid hours, as providers try to cross-subsidise the funding shortfall of free hours from parent-paid fees[18].

• In addition, most funds (90%) are distributed using a base rate rather than more responsive supplements, like statutory quality supplements to cover support of children with additional needs[19]. This has a negative impact on local authorities’ ability to drive up the quality of local childcare and results in underfunding for the free hours entitlements[20].

4. Does the Government’s current approach to funding childcare support represent good value for money?

• The UK spends less than 0.1% of GDP on childcare, the second lowest investment in the OECD[21]. British parents face the highest childcare costs in the OECD[22]. The average UK family spends over a third of their earnings on childcare; in France this figure is only 4 per cent[23]. The greater expense does not amount to better service: one study ranked British nurseries 35th out of 50 OECD countries in terms of quality of care[24]. 

• England is exceptional within Europe in the extent that it has deliberately shaped the childcare market to promote the provision of services by for-profit companies[25]. 84% of childcare is delivered by for-profit providers, as opposed to 3% in Germany or 4% in France[26]. The nursery sector in England is highly fragmented but international supergroups are now emerging and getting larger as consolidation continues[27].

• A key structural trend is the steady, continuing corporatisation of the market over time, as many providers have sought to expand their nursery brands locally, regionally and in some cases internationally[28]. Major changes have occurred in recent years. Consolidation within the private market has been rapid. The two largest companies – Busy Bees and Bright Horizons – now have 8% of the market share and provide over 60,500 places[29]. The childcare market in England was valued at £5.5 billion in 2017/18[30]. Private sector (for-profit) nurseries generated an estimated income of £4.7 billion (85%)[31]. This is split between £3.3 billion generated by incorporated companies and £1.4 billion generated by sole traders/partnerships[32].

• The rapid privatisation of childcare in England has taken place without any meaningful discussion of the potential risks[33]. However, numerous studies of early years provision around the world have concluded that non-profit settings offer better quality care[34]. Childcare is a labour-intensive industry and therefore cost-cutting measures invariably centre on staffing costs, either employing fewer or cheaper staff[35]. This, in turn, runs the risk of increasing turnover and lowering the quality of the care provided.

• In 2016, the OECD highlighted that a market-based approach to childcare leaves public authorities with less control over fees and less control over when and where services are provided[36]. It identified that market dynamics can result in for-profit providers drifting away from less profitable areas, so that very young children in poorer neighbourhoods are sometimes left without any provision at all[37].

• This is certainly the case in England, where childcare is of high cost but relatively poor quality, as noted by the OECD. High-quality childcare is often only available to wealthier families because access to high quality provision is constrained by income and location. The regulatory framework focuses on how childcare is provided but not on its quality; it does not have a responsibility to ensure equality of access for children and parents or ensure fair terms and conditions for childcare workers[38]. As a result, the childcare system is characterised by inequalities of access, poor quality, financial instability, and poor working conditions[39]. In September 2021, during the Westminster Hall debate on the call for an independent review into the cost and affordability of childcare in England, Steve Brine MP (Conservative Chair of APPG on Childcare and Early Education) spoke of ‘market failure in this sector’ and ‘urgent need for reform’.

Recommendations :

1. As a matter of urgency

I)                    Parents need to be able to claim their childcare costs in advance in line with the practice of most childcare providers who ask for payment up front.

II)                   The overall cap on childcare costs needs to be uprated to reflect the current cost of childcare and the percentage of costs covered needs to be extended for low-income families.

III)                 The Government must revise the ‘free hours’ funding so it reflects the true cost of provision of these hours. This public investment should include conditions for childcare providers, including a real living wage salary for childcare workers and the provision of enough places for twoyear-olds eligible for the ‘free’ 15 hours and children with SEND.

2. Direct funding to providers. Instead of trickling money into the demand side (parents), the state should direct funding into the supply side, investing in providers who meet established standards of excellence and equality. This approach enables local and national government to play a stronger role in driving up standards and ensuring equitable provision. It also makes it possible to introduce fee caps.

3. Target disadvantage. This could be done partly by reviewing the components of the EYNFF. The government should work to reduce inequality in the childcare system by increasing the pupil premium, so that it effectively targets disadvantage[40].This way local authorities would be able to support providers to cover the real cost of providing high-quality childcare in their area, including children with additional needs.

4. Fill the gaps. Marketised provision can leave poorer neighbourhoods underserved. The government should map gaps in provision and work to fill those gaps. This would include getting a better understanding of how funding falls are affecting provision, including Sure Start, and increase the provision to children that are most in need.

5. Quality Childcare. Quality is intricately linked to the working conditions in the sector. A national workforce strategy is needed as part of a wider independent review of the early years sector. Childcare professionals should see national pay scales established and minimum pay set at the Real Living Wage. Training should be provided to improve qualifications and career progression and conditions such as training and development opportunities should be a condition of receiving public funding.

6. The case for universal free childcare. High-quality childcare supports children’s cognitive and social development. It is particularly effective in improving the life chances of the most disadvantaged children. It is therefore crucial that children – particularly those from disadvantaged families – are able to access high-quality childcare. Yet at present access to high-quality education and care is severely constrained by income, with the result that those children who would benefit the most from such care not being able to access it. Moreover, recent policy changes exacerbate these inequalities.

The positive impact of childcare means that government investment in high-quality care makes good fiscal sense. The expected return on investing in interventions in the early years is estimated at 6-10% per year[41]. Ensuring access to affordable and flexible childcare would enable parents, especially mothers, to increase their earnings by between £7.6bn and £10.9 bn every year, generating up to £28.2 bn in additional economic output per year[42].

January 2022