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?
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.