The tax-free childcare scheme has been widely welcomed but there are important questions about the effect the scheme will have on childcare prices. If the scheme contributes substantially to price inflation in childcare, not only will its value will be eroded over time, but it could reduce access for those families least able to afford childcare.
Staff wages are by far the greatest cost for childcare providers, which can in turn only charge prices that are affordable to parents bearing in mind typical wages. In the long run, childcare prices should therefore rise broadly in line with wage trends. Despite this, in the last five years the average price of childcare for under-2s went up 27% - significantly outpacing both the rate of inflation and wage increases. A number of factors have contributed to this trend:
• Wages in the childcare sector have historically been very low and are being pushed up faster than average wages by rising quality standards and professionalisation in the early years workforce. As wages for childcare staff remain low compared to other skilled workers, this trend is unlikely to have run its course.
• The childcare 'market' has low profit margins and high barriers to entry, whilst the information available to parents on local provision is often weak. If as a result local markets do not respond effectively to changes in parental demand, price inflation may be the result.
• Many providers have been squeezed by other costs, such as the increased price of energy and business rates that are high for small businesses.
These pressures mean that any headroom for price increases created by a new injection of funding is likely to be filled - and quickly. As two thirds of full childcare providers are run for profit, it would be unsurprising for these providers to maximise their fee levels. So the cash support offered to parents is likely to lead to providers putting up their prices, quickly eroding the value of the scheme and leaving parents no better off.
We have seen this happen before here in Britain. In the 18 months after April 2003 when the childcare element of Working Tax Credits were raised to cover 80% of childcare costs (up from 70%) we saw big price rises: nurseries for under twos went up by 10%, childminders' prices went up by 11% and after-school clubs saw the biggest hike going up by 32%.
And this has happened elsewhere. As the IPPR has showed, in Australia, the government implemented similar reforms and as a result, between 1996 and 2007, childcare costs rose by over 100% compared to a rise in inflation of 27%. Or look at the Netherlands, where reforms in 2005 dramatically increased support for parents. Costs to the state ballooned but as childcare provision shifted towards for-profit providers and wealthy urban areas and away from not-for-profit models and less wealthy rural areas, the benefits for low income parents didn't materialise.
The tax-free childcare scheme also ignores important flaws in our childcare system, such as low quality and limited access to flexible provision. I recently wrote about the substantial gaps in childcare that particularly affect working parents, disabled children and families in rural areas. Public investment should be used intelligently to address these gaps. Unfortunately the tax-free childcare scheme may exacerbate inequalities in access to childcare as the purchasing power of wealthy parents who enjoy good access is increased, creating little incentive for providers to expand into less profitable areas.
There are solutions to these problems but they involve more significant reform than the government has been willing to contemplate so far. By international standards, we have an extremely lightly regulated childcare market (although one that is carefully regulated for quality standards). To ensure that support such as the tax-free childcare scheme is effective and children and parents across the country enjoy equitable access to affordable high quality care, we must accept that a pure market model is not sustainable.
Sharp price increases in childcare in the next few years could come back to haunt the next government. If policy makers do not acknowledge the flaws of the tax-free childcare scheme and think about the next steps for reform, they may find that they have an empty tool box when this happens. The tax-free childcare scheme - welcome as the extra cash is - should only ever be seen as a bridge to more fundamental reform in the childcare system.