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Ed Balls’ new plans would leave taxpayers with world’s highest childcare bill

23 September 2013

Up until about 2004, the Labour government’s strategy of fighting poverty by concentrating on three priorities – government spending, government spending and government spending – had seemed to work rather well. On a number of measures, living standards of low- to middle-income earners showed notable improvements.

But from then on, progress on this front suddenly came to a halt, or even went into reverse again on some measures. This was a bit of an embarrassment for advocates of a Greek-style approach to public spending, because during those years, they had largely gotten their way. Social spending in the UK had reached record levels, and with that potential largely exhausted, what else was there to do?

At its party conference in Brighton, the Labour Party has now finally found the answer: more government spending. Parents of 3- and 4-year-old children are currently entitled to 15 hours of free childcare per week, a number which Ed Balls plans to raise to raise to 25 hours, financed by an increase in the bank levy. That is good electioneering: everybody likes children, nobody likes banks anymore, so what could be more obvious than taking something from the banks and investing it in the children?

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But it is also poor economics. Firstly, it has to be reemphasised that public childcare subsidies in the UK are already amongst the highest in the world. As a proportion of GDP, the UK already spends as much on childcare subsidies (1.1%) as Sweden, which is usually presented as the role model on this count. Apparently, Swedish spending levels do not guarantee Swedish outcomes. In fact, the UK probably spends a lot more than Sweden per hour of childcare, because while overall spending levels are virtually the same, coverage in Sweden is more extensive.

Secondly, among the various funding streams of childcare subsidies, the entitlement to free childcare is among the least well-targeted ones. It is a universal benefit in kind, to which David Beckham’s children are just as entitled as the poorest children in the country, and since entitlement is irrespective of the parents’ work status, it also does little to encourage parental employment. Neither is there an incentive for parents to choose a cost-effective provider, because there is no user co-payment involved. For all its faults, the childcare element of Working Tax Credit is at least targeted at low-income parents in work, and since it only refunds 70 per cent of childcare costs, it retains an incentive to be cost-conscious. The entitlement to free childcare hours does no such thing.

Thirdly, the bank levy is not actually paid by bankers, no more than tobacco tax is paid by tobacco producers. It is ultimately paid by consumers. At the very least, it is not the horn of plenty that some people in the Labour Party seem to take it for.

If the Labour Party is concerned about access to childcare for low-income families, they should have concentrated on the supply side instead. They should have taken a good look at the high setup costs, the costs of the inspections, the detailed input regulations such as minimum staff-to-children ratios, the regulations concerning premises, activities etc.

Cost-effective childcare is vitally important. Given Britain’s high proportion of children in single-parent households, and given the notoriously low work levels among single parents, cutting child poverty will not be possible without affordable child care. However, if Ed Balls’ proposal was implemented, British childcare spending would soar ahead of even Swedish levels. Pumping even more resources into such an inefficient machinery is surely not the answer.

Note from Fraser: This is reprinted from the IEA’s blog, with kind permission. I thought CoffeeHousers would enjoy it.

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Show comments
  • Mr Creosote

    On the costs of childcare, you might like to add the necessity for “peer to peer” observations – that’s where one staff member has to be paid to watch another one work! Another money-saving wheeze dreamed up by Ofsted.

  • JabbaTheCat

    We already have the most expensive childcare in the world, it’s called the state education system…

  • 2trueblue

    Balls should never again be allowed to be in charge of the public purse. Few people seem to be able to connect with the word ‘public’, which is of course ours. Whilst he is giving out child care, Millipede will be building houses. Perhaps this will all be done using the PFI modal that was so successful in their time with hospitals, schools, and roads. Great.

    • Oedipus Rex

      PFI? I doubt it – that was a tory/Major thing that the Thatcherite-lite Blair took on (even after opposing it in opposition)
      At least after 30 odd years of neo-liberal economics, Labour seems, I hope, to have gone back to its more socialist roots. I’m sure, though, as a ‘blue’ you believe that these big public projects can be delivered totally privately to all our advantage.

      • 2trueblue

        PFI was enshrined during Liebores 13yrs. Look it up. The hospitals built in their time are unable to run effectively, the same for the schools. Like most things financial Liebore had no idea what good houskeeping was about and it is not something they will ever learn by the sound of it. The country has no proper infrastructure after their 13yrs., yet we were continually told that they were doing a great job with our money. All spin and the only real truth was uttered by Liam Byrne……… there is no money. Liebore produced a vacuous legacy on every level, which will take a generation to fix.

        Visit some other countries who are supposedly worse off than we are and their infrastructure is better. In Ireland we drove on roads from one end of the country to the other and did not encounter one pot hole. Our roads are a mess. Just one example.

    • Mynydd

      As I understand Mr Balls will increase child care from 15 to 25 hours a week. To me this means the present government (Conservative and Lib Dem) are already paying out of the public purse for child care.
      Houses are built for sale or rent, so what is wrong with that. so how do you view the present government scheme to help young people with the purchase of £600.000 houses. Is that the best way to spend borrowed money, especially when these same young people will have to pay down this addition to the national debt in their old age

  • Colonel Mustard

    Bear in mind that single people and childless couples on low incomes will be paying tax so that high income parents get free childcare.

    “Equality and fairness” UK-style.

  • Mr Creosote

    This is not even a bank levy (which many people would support) it is actually a further stealth tax on childcare providers, who already subsidise the 15 hours of “free” childcare currently available. The funding available does not even cover the wage bill. The cost of the 3-4 year olds is covered by increased fees for the 0-3s.

  • HookesLaw

    It would not be funded by a bank levy, it would be funded by higher bank charges and lower interest on bank accounts.

    • Mynydd

      Surely Mr Cameron/Osborne knew this when they introduced the bank levy.

  • realfish

    ‘…At its party conference in Brighton, the Labour Party has now finally found the answer: more government spending…’

    But I am afraid that that it is now what is expected by the Mums-set militia and many in wider society, Brown’s client state having taken root in a country that has got used to growing comfortable at the teat of government.

    No wonder Miliband, his Union bosses and his friends at the BBC are busily engaged in a mass hypnosis, encouraging people to see themselves as badly off; as members of the squeezed middle, co-opting us all as the new poor, onto his side and into his votes for spending strategy.

    • HookesLaw

      what evidence do you have that this mumsnet militia want more spending? Do you go on mumsnet?

      • realfish


        • HookesLaw

          Well I never…

    • Mr Creosote

      When are the stupid general public going to wake up to the fact that there is no such thing as “free” childcare – just like there’s no such thing as “affordable” housing.

  • wycombewanderer

    Balls sees no green shoots in the economy yet the money tree is laden with fruit!

    • telemachus

      Tell that to the folks in Tower Hamlets who cannot shoe their children

      • McRobbie

        But who can afford to smoke and drink and bet and watch 60 inch plasma TV with 3d.

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