Inflation has eroded the value of childcare subsidies offered to poorer working families in the UK, potentially preventing hundreds of thousands of low-income parents from working as much as they would like, according to new analysis by a leading charity.
Citizens Advice, whose staff and volunteers help families coping with personal finance and benefits problems, estimates that in 2016 subsidies could be expected to cover up to 33 hours of childcare for a lower-income parent in full-time work with a one-year-old child. By 2022, they would cover only 27 hours.
Business groups have already flagged childcare as a key issue contributing to labour shortages ahead of the budget on March 15. Bringing more people into the workforce is a priority for ministers, as they seek to increase the UK’s long-term growth prospects.
The squeeze identified by Citizens Advice has occurred because universal credit, the part of the benefit system that supports people on lower incomes, has a limit on funds available for childcare — just £646 a month for one child under two, for example.
Christine Farquharson, economist at the Institute for Fiscal Studies think-tank, said: “The caps on childcare support through the in-work benefits system have been frozen in cash terms since 2005-06, leaving them almost 60 per cent lower in real terms than when they were introduced.”
While there is a focus on attracting older workers and the long-term sick back into the labour market, measures to make work pay for parents could have a more immediate effect.
The government has a range of options, depending on which part of the labour market it wishes to target. Childcare subsidies are delivered through a complex mixture of policies that vary with the age of the children, household shape, income and working patterns.
Think-tanks say that increasing the generosity of schemes such as “tax-free childcare” would largely help parents who are already working and have a small impact on employment rates.
However, improving the way support is offered through UC could have a far bigger effect.
Citizens Advice estimates that the UC squeeze means that a single parent in a minimum wage job outside London with children under 2 can work a maximum of 26.5 hours before reaching the point where paying for childcare makes working further hours uneconomical. In London, the figure is under 20 hours.
Rebecca Rennison, a policy analyst at Citizens Advice, said: “Parents on UC can quickly find that working more hours can mean that they pay more in tax, childcare and clawed-back benefits than they earn. We know the government wants to see more people in work, and yet we have people, in effect, being asked to pay to work.”
A recent report by the Resolution Foundation think-tank argued that ministers should reform childcare support for low-income parents on benefits. It found that just 50 per cent of women aged 25-54 in the poorest fifth of households work, compared with 94 per cent in the richest fifth.
But childcare support for low-income families is “both administratively confusing . . . and often off-putting in the first place since claimants must pay childcare costs upfront,” the think-tank noted.
These upfront costs are seen as a key deterrent to work. UC is paid five weeks in arrears, so people returning to work must cover the costs of childcare for a month before receiving their first pay cheque from their new jobs. This can mean accepting a new job causes cash flow problems for low-income families.
Rennison said: “This is not a hypothetical problem. Our advisers meet people who have debt, in particular, who struggle to work their way out of it because they cannot pay for the upfront childcare costs.”
Another issue identified by Citizens Advice relates to a scheme called the Flexible Support Fund, which helps people unable to pay for initial costs related to new work — including the first month of childcare. But the fact that families have not paid their childcare bill themselves in the first month means that they are still not allowed to claim UC for childcare in the following month.
Rennison said: “The FSF delays, rather than eliminates, the cash flow problem.”
The department for work and pensions noted that, over the past five years, the government has invested more than £20bn to help with the cost of childcare.
