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On Childcare, Tax Breaks for Nannies Can't Be the Answer

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Few political debates have made more progress in 2012 than that around childcare. In the past 12 months, all three major parties have come to see reform as an economic and political necessity.

Although hard policy proposals are yet to emerge, it's now clear that one yardstick for 2015 will be the strength of parties' plans for improving the availability and cost of childcare for low to middle income working parents. In the meantime, a search is on for fresh ideas that would gain early ground on this politically valuable new terrain.

For the Tories, there's one idea that just won't go away: making childcare tax deductible. You can see the appeal. Allowing parents to offset their spending on childcare against tax would combine the sharpness of a tax cut with the salience of the rising cost of living. It would be pro-family and pro-women, addressing the Coalition's biggest electoral weakness. And it would fit with a rhetoric of 'making work pay'. No surprise, then, that the idea made the cut on a very short list of possible policy priorities for the second half of the government's first term at a recent meeting of the PM and senior ministers. Now, it bubbles away as an option for the Autumn Statement, with senior figures seeing it as a possible 'game changer' in the quest to win back women voters.

Let's hope they resist. In its simplest form, making childcare tax deductible would be a tax break for nannies. It would give higher rate taxpayers twice as big a benefit as basic rate taxpayers and would give most of all to those who can already afford to spend the most. In fact, so obvious are these flaws that when the Conservatives last seriously considered the idea in 1995, they rejected it because it 'gives most help to those who can afford childcare ... and no help to those who do not pay tax'. Howard Davies, head of the CBI at the time, said he wouldn't regard giving him cash back for his au pair as a 'good use of public money'. Now, more than ever, he's right.

But let's play fair and treat an unrestricted version of the policy as a straw man that no-one one seriously signs up to. Are there ways to make childcare tax relief better targeted? Certainly the tax rebate going to parents could be limited to the basic rate of income tax so that low and high earners received the same proportion of support. The government could also cap the amount of support that could be claimed, to avoid giving big subsidies to high income households with nannies.

Would that give you a progressive childcare policy? Luckily we know the answer to that question because such a scheme already exists. It's called employer-supported childcare vouchers and it allows parents to offset up to £55 a week of their childcare costs against tax, with the rebate limited to the basic rate of income tax. Employers are even required to make the vouchers available to all their employees to make sure they don't become a perk for only high earners. Even so, while most beneficiaries are on middle incomes, around half of the money spent on this carefully designed scheme goes to higher rate tax payers, a group that accounts for only around one in ten parents. And as for the lowest paid workers, so few benefit from the scheme that when the government recently allowed employers to exempt their minimum wage workers from support, its defence was that almost none of them benefit anyway.

None of this belies the instant political appeal of a tax break for childcare. These schemes are popular with the parents who benefit and there may well be short-run political gains from extending this form of support. But in the long-run, the reason childcare has risen up the political agenda is the daily, material grind that parents face in trying to meet the costs of childcare on low and middle incomes. The long-run political gains on childcare will be reserved for the party that actually makes that situation easier for the households that are struggling the most.