Why greater investment in early years should be a no-brainer for the Chancellor

Claire Crawford & Laura Outhwaite

With the Budget just around the corner, the calls for the Chancellor to tackle soaring childcare costs are growing into a clamour. A recent survey estimated the average cost of a full-time childcare place for a 2-year-old in England at nearly £15k per year – an eye watering 45% of the median annual salary of a full-time employee in the UK. For a parent – unfortunately still usually the mother – considering whether to work following the birth of their child, knowing that such a large chunk of their take-home pay is likely be swallowed by childcare costs will inevitably give them pause. This has implications for the economy in the short-term, potentially drawing valuable labour out of the workforce at a time of high labour demand and skills shortages. It also has implications for inequalities in school readiness and beyond, as those from lower socio-economic backgrounds are less likely to access high quality early years education, which benefits children’s development.

Public opinion seems to be pointing clearly in the direction of greater support for early years. But does the evidence support this position? And how generous would the Chancellor have to be on Wednesday lunchtime to make a material difference to these challenges?

Our new briefing note reviews the evidence on the effects of offering free or highly subsidised childcare for parents and children. It also compares what the evidence suggests might be the optimal policy to what is currently available in England, to highlight what additional investment might be required.

There are two main takeaways:

• First, there is a strong evidence-based case for significant additional government investment in early childhood education and care (ECEC). The evidence suggests that offering additional free or highly subsidised childcare for parents of 0-2-year-olds could encourage more mothers to work (more) and also benefit children’s development. Part-time provision (e.g., 15 hours per week during term-time) might be sufficient to deliver the benefits for children, but would be unlikely to increase mothers’ labour supply very much; greater investment (offering full-time provision, ideally across the full year rather than term-time only) would be required to achieve this.
• Second, quality is key. This is vital to maximise the benefits for children’s development, but its importance goes beyond this. Parents will be more likely to use the provision available – especially for younger children – if they are happy with the quality of care their child is receiving, making it crucial for labour supply decisions. Moreover, evidence suggests that a child attending a low-quality setting can have negative effects on the wellbeing of both parents and children. For all of these reasons, it is essential that providers are paid sufficiently for the care they deliver.

What does this mean the Chancellor should do on Wednesday lunchtime? Our reading of the evidence leads us to make two primary recommendations:

• The funding rate paid by the government to cover the free early education entitlements for 3-4-year-olds and disadvantaged 2-year-olds in England should be increased. This would help to cover cost rises that are largely out of providers’ hands (e.g., energy price rises, increases to the National Living Wage) and reduce the incentive for providers to charge more for privately paid-for hours of care to compensate for the lower rate paid by the government. This would enable providers to reduce fees and/or invest more in raising the quality of care they provide.
• A more generous childcare subsidy should be introduced for families of 0-2-year-olds, to reduce the financial barriers to work, particularly for mothers, and support children’s development. The subsidy should be progressive – higher (potentially 100%) for families with lower income – to minimise the risk of such reforms widening inequalities. As discussed in more detail in our submission to the Education Select Committee’s Inquiry on Support for Childcare and Early Years, it would be more transparent for such a subsidy to be delivered via something like the tax-free childcare system than by offering more free hours of care during term-time only, whose benefits are less than the headline amount for families who need childcare throughout the year.

It has been widely reported in the media that the Chancellor will announce the cap on childcare costs that can be claimed by Universal Credit recipients will be raised, and that families will be able to claim childcare costs upfront rather than in arrears. While this will undoubtedly be good news for families for whom these restrictions would otherwise prevent them from using childcare or moving into work, if that is the limit of the financial support for childcare announced on Wednesday lunchtime, then the Chancellor will have disappointed many – and gone against the evidence outlined in our briefing note.

What could arguably be described as ‘tinkering around the edges’ is not going to generate the kind of sizeable reduction in childcare costs that is needed to make a material difference to families’ budgets, parents’ labour supply decisions or children’s development. It is also crucial that any actions taken to reduce childcare costs for families are not delivered at the expense of reducing the quality of care on offer. For both reasons, as we highlighted in another recent briefing note reviewing the evidence on the links between childcare ratios and children’s outcomes, relaxing childcare ratios is unlikely to be a good solution to the current childcare conundrum either.

The evidence suggests that investing in high quality ECEC is likely to provide a triple whammy of benefits – improving children’s development, increasing family income and boosting productivity – and that the long-run benefits are highly likely to outweigh the short-term costs. We can only hope that current labour demands are sufficient to provide the short-term incentive needed for the Chancellor to look beyond the gloomy fiscal position and make the kind of long-term investment needed to deliver these benefits.