The government’s childcare plans leaves a £200 million question unanswered, as working poor families miss out on vital support

The government today launched a consultation on proposals for extra support with childcare costs for working families.

Katie Schmuecker is a policy and research manager at the Joseph Rowntree Foundation (JRF)

The government today launched a consultation on proposals for extra support with childcare costs for working families.

This is a crucial issue given that the cost of childcare has doubled over the last five years, creating a significant barrier to parents entering work or increasing the number of hours they work.

So far, the media coverage has been dominated by comment on the childcare voucher element of the scheme and the fact that stay-at-home parents will miss out. However, there is another part to the proposals that applies to families in receipt of Universal Credit.

If our primary concern is to ensure work helps lift people out of poverty, then we should be more interested in the help targeted at low income households through Universal Credit.

At the moment, people receiving tax credits can get assistance with 70 per cent of eligible childcare costs. Under the proposals this will increase to 85 per cent where all adults in the household are earning enough to pay tax. The government has found an extra £200m to fund this from 2016 onwards.

So is this a good idea?

On the positive side, the government’s proposals will serve to correct a fundamental problem in the current design of Universal Credit. JRF research shows, as things stand, a second earner or a lone parent would actually be worse off working full time on the minimum wage under Universal Credit than they would be if they worked part time.

This is a pretty big problem for a system that is meant to ensure that it always pays to work more hours.

This disincentive occurs due to a number of things: the need to pay for more childcare as more hours are worked; the rate at which the amount of Universal Credit you’re entitled to reduces as earnings increase; and the fact that on the minimum wage you have to start paying income tax when you work more than 29 hours a week.

By linking the increased support for childcare to the income tax threshold, the government’s plans will correct this problem with Universal Credit.

But it’s not all good news. There are 1.5m working families that will be in receipt of Universal Credit once it’s rolled out. If we look at their current working patterns, only 600,000 of them would be eligible for the extra support. 900,000 would miss out because not all adults in the household earn enough to pay tax.

Of course, what we cannot know is how the offer of extra childcare support might alter people’s decisions about whether and how much to work. Assuming there is work available and people are aware that this extra help is on offer – which are big assumptions – it could act as an incentive to take up more work.

But as things currently stand, the majority of people in work and receiving Universal Credit are likely to miss out on this extra help with childcare, which rather begs the question of whether this is the best way to spend £200m. But unfortunately this is not a question that the government has included in its consultation.

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