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Methods in Motion Blogpost 24: Jerome De Henau – Can We Afford Universal Childcare?

26 May 2017
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The case for universal public childcare is strong. But – in a question that resonates in many party manifestos – 'how do we know' it’s affordable?

Along with education, health and social care, the provision of good quality childcare is an essential part of the social infrastructure of an economy. Without this infrastructure an economy cannot function properly and social life wouldn’t be sustainable. However, high-quality, accessible and adequate childcare comes at a cost. Whether it should be borne privately by parents or by the wider society (the state) is a matter for little discussion since the benefits extend beyond direct recipients and are long lasting.

The case for universal childcare public provision is therefore strong. But – in a question that resonates in many parties’ manifestos – how do we know whether it’s affordable?

To find out, it first needs to be costed, both in terms of initial spending and in terms of recurrent annual spending (once the facilities are built and the staff trained, they will then need to be paid every year). The costing elements include – on top of building and training costs – quality criteria such as the number of children per member of staff and the number of hours of childcare; working conditions such as hours worked and the level of pay, plus pension protection, holiday pay etc; and the cost of running a facility (heating, food, IT equipment, toys etc). The total cost will thus depend on the total number of pre-school-aged children covered and for how long, both per week and over a year. In recent estimates I published in a Women’s Budget Group briefing, it amounted to up to £55bn per year, or about 3% of the UK Gross Domestic Product. In other words, ten times more than current annual public spending on childcare and about two third of the UK’s entire public education budget.

Funding such an amount may well be unpopular if it were only possible to do so by raising the tax rates on incomes or borrowing. However, tax receipts don’t only depend on the average tax paid on a pound of income, they also depend on the size of the income base (the tax base). And, to assess the latter, it’s important to consider the full effects of providing universal childcare.

The second step, therefore, is to look at what childcare provision might do to the economy – and in particular to employment. Not only would the policy create direct employment in the childcare industry itself, it would also create employment in all the industries that provide goods and services to it such as food, electricity and training. (Known as the ‘indirect multiplier’ effect, this can be clearly measured with input-output tables – statistical tables that measure all the transactions between firms.) In addition, part of the earnings of the newly employed will be spent on goods and services in the domestic economy which will increase employment further (the ‘induced multiplier’ effect).

The third step is to measure the fiscal impact of such employment effects. First, increased employment earnings will bring additional income tax revenue to the Treasury. Second, as households consume more this will increase indirect tax revenue such as VAT. Third, since most new jobs are likely to be taken by unemployed people and/or those who couldn’t look for jobs before universal childcare due to their caring responsibilities, they will no longer require (or at the very least, require less) social security benefits.

All these effects can be calculated using simulation tools that apply the existing tax-benefit system on households to see – depending on their Children playing imagecircumstances – how much they pay in tax and receive in benefits. If income and employment conditions change the new tax-benefit situation can be simulated for each individual or household. And by aggregating individual effects over the entire population, the total fiscal effect can be worked out.

In Costing and Funding Free Universal Childcare of High Quality, the Women’s Budget Group briefing previously cited, our ballpark estimates of employment and fiscal effects have shown that high quality universal childcare, using well-paid and highly qualified staff, would create 1.5 million full-time jobs. The annual tax revenue raised from these – as well as the reduced social security spending – would therefore cover about 90% of the gross annual £55bn investment required.

As for funding the remaining 10%, I would argue that borrowing (a modest 0.3% of GDP) is justified on the grounds that both children and wider society benefit from better childcare, with their higher earnings in the future producing more tax revenue to pay back the investment. Alternatively, the tax burden could be increased modestly now on the grounds that the benefits – of healthier and better educated children who in the future will contribute to paying for their pensions and care – will accrue to everyone.

 

Jerome De Henau is a Senior Lecturer in Economics whose research interests centre on gender, household economics and fiscal and social policy. He tweets from @jerome_dehenau.