Thank you. I will have to ask that you project your voices, because the room does not have good acoustics and I gather that the speakers are not working terribly well.
Thank you for coming to give evidence. Do you mind if we refer to you by your first names? No? Thank you. Will you start by summarising briefly what your views are on the Bill that we are discussing?
Sam Royston: Like the other witnesses, we welcome the extra spending on child care. It is important. Our particular concern is about the interaction, and I know that you have just heard about that. We are very concerned about it. Any change in income or circumstances will change whether someone is better off on tax credits, tax-free child care or universal credit. Lack of parity between the various systems further complicates that. In particular, the caps are different, so whether you are able to average costs and whether you are paid in advance or in arrears will affect your choice.
The matter is not as straightforward as just looking at a particular point in time. Tax credits are based on yearly income, so you might be eligible for more support from tax-free child care at one point, but because you are pregnant you may lose a significant amount of money if you change to tax-free child care. Similarly, if you have a fluctuating income, because you can switch only once on tax-free child care, you might be better off waiting until later in the year. All of that makes the complexity difficult.
Our main concern is that interaction, but there is one anomaly that we are concerned about in who is eligible for tax-free child care: people on tax credits who are not eligible for any help with child care.
Our third point is about looking at a smooth journey between systems and smoothing it out. There has been a lot of focus on delivering tax-free child care, but very little attention has been given to looking between the systems. We would very much welcome the Bill being amended so that tax-free child care could go ahead, as it is in the Bill, but with further consideration of all the interaction so that there is a smooth journey. For example, if it was decided that child care accounts would be useful—we think they would be useful for universal credit claimants—people could claim them without the need for further primary legislation.
Victoria Todd: We have many of the same concerns as those Sue has mentioned. We are particularly concerned about the complexity and how that will be communicated to people, what guidance will be available, and better off calculators. We are also concerned about the complexity not just of universal credit and tax credits but of other things like passported benefits, and about how everything will have to be taken into account to work out the position.
We have some concerns about the self-employed and about how the scheme will work for people who may have a loss in an entitlement period, but who may well make a profit over the annual period. Our main concerns have been covered by Sue—particularly those on the tax credit anomaly. We are concerned that people will not realise, because they are not getting support in tax credits for their child care, that if they go to tax-free child care, they will lose the rest of their tax credit award. That is a huge concern.
Ellen Broomé: We, like the rest, welcome the extra investment that the Government have put in. That is welcome and will be welcomed by parents up and down this country. Some of the changes we have seen, with the increase in the cap and the extension of the scheme to cover children up to 12, are welcome and have removed some of the arbitrariness that we had with the employer-supported voucher scheme. Those things are all welcome.
Some of the issues that come up in the Bill highlight the fact that, while the scheme is a welcome step forward, it does not address some of the long-term challenges on affordability, accessibility and quality. I have three main concerns. My first concern is that higher-income earners are the most likely to benefit most from the scheme, because they consume the most child care. The Bill is a missed opportunity to target those on lower or more modest incomes, for whom child care costs are a barrier.
Secondly, it is likely that the scheme will lead to some child care cost inflation, and we already have very high child care cost inflation. The Bill is likely to further increase that, which will reduce the value to parents in the medium and long term, which is a shame.
Thirdly, parents in the most disadvantaged areas and those with disabled children are least likely to have access to the child care they need—child care that is affordable, accessible and high-quality. Because of the public money we are spending and because the tax-free child care does not come with quality conditions and probably will not drive new provision, the accessibility and quality challenges for those groups in particular—those in disadvantaged areas and disabled children—will probably not be addressed. A number of amendments could be made to the Bill that would improve the situation, and I am happy to outline those further.
Thank you. I have a follow-up question for each of you. Sue, the Government’s approach to dealing with some of the added complexity that you outlined—it sounds quite worrying—is to provide a better off calculator for parents, presumably in an online format. Do you think that that is adequate and, if not, what else do you want to see the Government provide?
Sue Royston: No, I do not think it will cover all situations. I think it could be quite misleading if someone goes in and looks just at one point in time. First of all, the current system and tax credits deal with a yearly income, so there would certainly need to be a question that said something like, “If your income is likely to change in the future, you need to seek advice.” I do not think any online calculator could deal with that situation with yearly income. People in the tax credits system find that complicated enough as it is.
In terms of realising about not swapping, it becomes hugely complicated. We share Victoria’s concerns on the self-employed, where income is often very lumpy. The calculator would also need to say, “If your income varies a lot, you need to seek advice.” The fact that someone is better off at one time of year does not mean that it is a good idea to swap, because the next month they might need to go back to universal credit, because they might have virtually no income. They would then not be allowed to switch again later in the year without losing out on four years of income.
Victoria, I appreciate that you are very much highlighting some of the concerns and complexities that you think will arise. Does the Low Incomes Tax Reform Group have some proposals on how some of that can be addressed? Are there suggestions for the Government? I appreciate that that might be a difficult question to answer, and I appreciate that you might not have the proposals at the moment.
Victoria Todd: On the tax credit interaction, I think that there are ways that clause 29 could be amended so that the comparison is not with the whole tax credit award. Rather, it could be with just the child care element. There are other options, such as to allow people on tax credits and universal credit to have tax-free child care in addition, and that would get rid of all the interactions. Certainly, we do think that there are things that can be done.
We share Sue’s concerns about a better off calculator. I think we say in our evidence that we worry that it may well be impossible to create something that can cover all the scenarios. I think people at the lower end of the income scale will be caught in a very difficult position, because if you have higher income and you are not currently receiving any child care support, it is fairly straightforward. The scheme, as a stand-alone scheme, is okay, but when you introduce all these complexities it is a problem.
We do have some suggestions for how things could be smoothed for the self-employed—things like averaging of income across the year, rather than just the three-monthly period. That will not pick up all the self-employed, such as people who maybe just have a bad year but who still need that support—our suggestion would maybe be some sort of minimum hours threshold as an alternative.
Thank you, that is very helpful.
Just one more question for Ellen. You mentioned in your opening comments some of the challenges for parents of disabled children. Would you mind setting out what you think are the main issues in the Bill, where you feel that some of those additional challenges are not being addressed?
Ellen Broomé: Absolutely. I think it might be helpful to set out what some of the extra challenges are for parents of disabled children. Obviously, they face higher costs and there is less quality provision for them. We recently supported a parliamentary inquiry that spoke to a lot of parents. We found that 38% of parents paid between £11 and £20 an hour for their child care and 5% paid more than £20 per hour. This is obviously very high. As a result of the child care costs, 72% of those families had cut back on or given up work. These are some of the challenges.
There are three changes that I would really like to see in the Bill, which I think would really help parents and disabled children. One is around the definition of “eligible child care”. At the moment, it is only for the main purpose—work—which is fine, but we know that there are very intricate complexities, and the difficulty of parents with disabled children managing caring and work means that sometimes they need to buy child care outside work hours, maybe on a Saturday, or maybe respite care or short breaks. It would be very beneficial for those parents if we could see an extension of the definition of “eligible child care”.
The other change I would very much welcome is raising the age for eligible children, so that all parents of disabled children under 18 were eligible to claim for them. I think that would bring this piece of legislation in line with other legislation that we have, including the Childcare Act 2006. That would be welcome. We know that parents of disabled children need to access child care for longer than their peers who are parents of non-disabled children.
The third thing—this might be slightly pie in the sky, but I will put it out there—is that we would really welcome some local pilots on how we can deliver effective, flexible, high-quality child care for disabled children, probably jointly between the Department for Work and Pensions and the DFE. I think that would help, because we really do not know what would best help. Another way that you might be able to do it is to raise the 20% figure to 30%, so that parents of a disabled child who were claiming DLA, for example, would get 30% back, rather than 20%.
Ellen has covered a great deal of what I was going to ask with regard to disabled children. It was very interesting to hear your comments.
Just one question on that. In terms of the supply side, have you any evidence that would suggest that the sort of changes you have talked about would stimulate increased provision, or do you feel that you would need a pilot to be able to establish that?
Ellen Broomé: A pilot would be very welcome. However, the idea of perhaps having a higher percentage for disabled children might stimulate that, because we know that demand is out there, but parents cannot necessarily afford to pay for it and providers cannot afford to provide the quality child care that they need for disabled children on the money that they can receive. It would therefore be an interesting idea to take forward, perhaps in a pilot with a view to rolling it out nationally.
My other question is about the information available for parents. It was interesting to hear your thoughts, and we had a great deal of evidence this morning about how best to ensure that parents are making the right choice. Is there anything further that you would like to add on that? Obviously, you were concerned about whether an online calculator would be sensitive enough. What would be sensitive enough? What would your recommendation be?
Sue Royston: Given the situation as it is, it would have to tell people to seek advice in certain situations. I do not think that there would be any way around that. As I said, we are keen for there to be an amendment that would allow tax-free child care to go ahead while allowing the whole interaction to be looked at more closely to see whether there are other ways. We put forward one way, which would be to combine schemes, as Victoria just said, so that you got part of your support for child care costs through universal credit and the rest through tax-free child care. As your means-tested amount tapered away, you would still have that. I would not expect the Bill to suggest that, and I know that it would have to be examined in a great deal of detail, but it would be good for the future if the Bill could allow the possibility of it at least being investigated.
Ellen Broomé: We have quite a lot of challenges and new systems in place for parents, including universal credit, tax-free child care and so forth. One of the things that I would welcome is a well-funded information campaign from central Government, working with employers, schools, health visitors, children’s centres and so on, to ensure that parents really have the information that they need to make decisions about what is best for them. A well funded and above-the-line information campaign would be very welcome.
I have a couple of questions for different people. Ellen, you said that you thought that the scheme would lead to price inflation in the sector. Could you expand on that and perhaps use this as an opportunity to talk to us about how that could be changed? Could some additional clauses be put into the Bill to stop that happening?
Ellen Broomé: What we have seen before with cash injections, which is what the scheme effectively represents, is that they are welcomed by parents, but the problem is that they do not necessarily expand the amount of child care; they just affect the amount of disposable income available. What we have seen from evidence abroad and work that we have done here in the UK is that such cash injections drive up price inflation. In Australia, for example, when a similar child care rebate of 30% was introduced, it coincided with a rise in child care costs of over 100%. In a single year, 2008, when the child care rebate was raised to cover 50% of costs, the prices rose by 10%. You can see the significant effect there in Australia.
Closer to home, we saw child care costs increase above the rate of inflation in both 2005 and 2006, when tax credit support for child care was increased and the Government brought in child care vouchers. In those two years, we saw child care costs increase by 18% for both under-twos and childminders.
This is happening in the context of prices already rising quickly— we have seen a 27% increase in child care costs across the board over the past five years. This type of cash injection could potentially lead to that. There may also be points about how we spend the money, such as attaching quality conditions that might help to go some way towards addressing that.
Sue and Victoria, you have both spoken very well about some of the anomalies in cash flow and about people who have lumpy incomes, if you like. Sue, could you explain that a bit more? What are the anomalies with payments in advance or in arrears, and what might those mean to a family who are moving between the systems and are on relatively low pay or have a moderate income? Victoria, could you say a bit about how you think we could tackle some of the issues with self-employment and lumpy incomes?
Sue Royston: First of all, in tax credits, child care payments are paid in advance, which has led to some problems with overpayment. As a result, in universal credit, child care payments are going to be paid in arrears. Our greatest concern about child care overall—and we have been really supportive of universal credit and have said from the beginning that we think it is a good system—is about the current proposals for how child care support will be delivered in universal credit. There are huge issues. It will not just involve people in one initial loan, as some people thought; people will have to have a series of loans and will get into debt with repayments. Budgeting advances were meant to cover that, but will not. There will be a reporting period; for some people that will be as long as a month, but other people will have only three days—it will depend on the assessment period and when child care payments are due.
We see that as creating huge problems. Child care accounts are a great thing and will be a very useful budgeting tool in tax-free child care. We would like to see them being made available to people in universal credit.
In effect, in the tax-free system—I know you will want me to keep to the remit of the Bill, Mrs Main—there is payment in advance under the scheme we are talking about. What you are proposing is making that available to more people.
Victoria Todd: It is mainly the self-employed. We welcome the fact that tax-free child care can be taken up by the self-employed, unlike child care vouchers. That is really positive. As I said before, we are concerned about people such as farmers who might have income in one part of the year and then lots of expenses, so that in one particular entitlement period they have a loss, essentially, when you look across the three months. We would like to see some changes to the rules for those people so that they could have an alternative, which could be seeing whether they would meet the threshold over the tax year.
As I said before, that will not cover everybody. There will still be people who have bad periods or a bad year and will still need child care support. We would therefore like to see a minimum hours requirement of about eight hours a week as an alternative for those people.
Ellen, you raised the concern that if you put more money into child care it will simply cause costs to go up, because there is a limitation on supply. Do you agree that costs would not go up if there was a greater opportunity to expand the supply of child care and make more child care available?
Ellen Broomé: Mechanisms—start-up grants and subsidies—to support the supply of high-quality child care would be very welcome, particularly in disadvantaged areas. There are high barriers to market entry, and we are not seeing enough people coming into the child care market. That is why we have an under-supply, which drives up prices. Effective mechanisms to drive up supply would be very welcome, but they would have to recognise that child care is not cheap to provide because you are looking at well-trained adults providing care for our future, so it should not be done on the cheap, if you see what I mean.
I represent Dover in east Kent, where there is a lot of deprivation—a lot of parents do not have a lot of money and find child care very expensive. A few years ago there was a war on childminders and many of them left; they were concerned that costs had risen. Does that accord with your experience of the world, and was it a shame that that happened?
Ellen Broomé: Childminders provide an excellent way for many parents to access flexible child care, particularly at the start or end of the day, or around the school day, and childminders are very well liked by parents who want to see their children cared for in a more home-like environment. The decrease we have seen in childminder numbers is a disappointment, because they provide something important for parents. There are steps that the Government and, indeed, local authorities could take to support childminders better and to keep more of them in the profession—to bring new people into the profession while retaining more. Childminder agencies might be one of the tools required.
I am going back on to topic. In your evidence, Sue, you say that you are concerned about the interaction between support for child care costs and universal credit. What particular aspects of interaction concern you most?
Sue Royston: How difficult it is going to be to decide which one to claim for those people—I think estimates are that there are between 50,000 and 100,000 people. Half of all children in households in the UK will be in households on universal credit, so we are talking about a lot of children on universal credit. Where you have varying levels of income, there is quite a range of people and it will change over time, so it is not enough for people to look at whether you are better off at this point in time—it will keep changing, and it will be very hard for people to assess that.
In the context of the Bill, do you think that your concerns about universal credit will be relevant from the point of view of putting money aside and having the tax addition?
Sue Royston: It is relevant, because people may actually move from one to the other wrongly and get less support than they should. They may move into tax-free child care and as a result get less support. We are also concerned about the journey backwards and forwards, and about the problems with switching and making decisions. The Bill is obviously welcome, but it adds a layer of complexity.
Can I go back to one of the points you made, Victoria, about people whose income might vary over the year? You gave the example of a farmer, who might have a lot of money coming in at one part of the year, but expenses going out at another. Some of the other witnesses have said to us that the three-month registration or enrolment only adds to the work that parents would have to undertake anyway. Do you see any merit in having longer periods—either a six-monthly or yearly registration? Are you content that we should stick with the three-month period but allow variations for individuals?
Victoria Todd: Certainly in our submission on the draft regulations we picked up on the point that it will be another administrative burden for the self-employed to have to look at a different test. We already have tax credits, and people may well have to do something monthly for universal credit, so it is an additional burden. There is a lot to be said for trying to get definitions aligned as far as possible. If income definitions are aligned, it is easier to do something every three months; if there are slight differences, which I think is the case here, that creates an administrative burden, so we would like to see a longer period in that respect.
On your point about the cost, Ellen, one suggestion has been that rather than saying, “Look, you have £10,000”—or whatever the maximum happens to be—“you go out and spend it and you get your top-up from the Government,” it could be linked to the number of hours, so that it stops the inflation of costs because it is linked to the amount of hours you can purchase. Is there any merit in that? What difficulties would you see in applying that across the country?
Sue, I want to pick up on a few other aspects of your evidence. You say there are a number of anomalies in the legislation as to who can or cannot receive support through the tax-free child care scheme. Can you detail the anomalies that concern you?
Sue Royston: The main one is that if a couple are on tax credits, both have to be working for at least 16 hours to be eligible for help with child care costs. They may well be on working tax credit but not getting the child care element. Particularly with respect to disabled children, there may well be a couple with one working full time and the other, say, working 12 hours because of caring responsibilities. They are not eligible for any help with their child care costs.
The messaging from tax-free child care has been that if you are working and earning at least £50 and you are not eligible for help with child care costs from anywhere else, then you can get help with child care from the tax-free child care scheme. These people are going to find that very complex because, as Victoria said, their tax credits will stop.
The second anomaly is that the Bill is not at all clear—and we have not been able to get clarity on this from officials—about what will happen to people who, say, live in London and have high rents and so are on housing benefit but not tax credits. It is little understood but you actually get help with your child care costs through housing benefit. Someone who was not on tax credits would in effect be getting an extra 65% of their child care costs paid through an increased amount of housing benefit. There has been no clarity about whether or not they are in or out of tax-free child care. Either way, it is going to be very complicated dealing with that anomaly.
Do you accept that for someone who is above the benefits threshold and cannot access any form of credits and welfare, this will be a benefit? It would effectively be more for the middle.
Ellen Broomé: The reason why it is so important to get this interaction between universal credit or tax credits and the new system right is that it determines people’s working patterns. We want to see encouragement of people, enabling them to go back to work, stay in work or take on more work if that would help their families. Some of the interactions that we are talking about, and some of the functionality of the scheme in itself, would hinder that. It would not enable parents to have the clarity of what kind of support would be available and, therefore, what type of work they would be able to do. That is why it is important to get this addressed.
On a slightly broader issue of the spread of the new money that is coming in, I think the Government have estimated that the additional money going in to helping families with child care costs through this scheme would be about £750 million a year after a couple of years. What is your view about who the main beneficiaries of that £750 million a year would be, versus perhaps who some of the lesser beneficiaries, or even the losers, might be? Who do you think they will be? Victoria, you might start us off.
Ellen Broomé: Just to say something positive, it provides the support on a per-child basis, which is really welcome, but I think we know that 80% of those eligible for the tax-free scheme will be in the top 40% of income distribution. It is really important to remember that the top of the income distribution will benefit more, because they are more likely to consume large amounts of child care. Personally, from our perspective, we would have liked to see more targeted towards low and modest-income families, where child care costs are a real barrier to entering or staying in work.
Sue Royston: We would agree. For instance, in universal credit, we think that there should be 90% support and not 85% support, because although it is very welcome for many, a lot of people who are lone parents on the lowest incomes, with high child care costs, are going to be worse off than under the current system, and we are worried about that. So yes, we would welcome more support for those on lower incomes.
Finally, we have been talking a lot about the interaction between universal credit, or tax credits, and this scheme, but one aspect of that that we have not really discussed is the cliff edge there as well. Do you see that as being a barrier to work? Potentially, somebody who is getting 75% or 85% of their child care costs supported could suddenly go to getting 20%, if they just have a small increase in their salary. Do you see that cliff edge being an issue, in terms of people not wanting to take extra hours or not wanting to take a pay rise?
Sue Royston: I think it is the lack of the smooth journey between the two, because obviously the people who are getting 85% are not actually receiving that, because that is means-tested. By the time they come to that, they will be getting more or less the same, so it is not a financial cliff edge, but it is a cliff edge in terms of having to change schemes.
We think it is about making that journey smoother. Life is very complicated and there is a plethora of child care support out there, and it is very complex. The smoother you can make that journey between schemes, the easier it will be for people to move on in work.
You were making some comments about child care being paid in retrospect as I walked in—sorry, I had to leave the room for a few minutes. Universal credit is being rolled out in my constituency, and that roll-out is going very well. I understand that on universal credit, child care can start a month before you start work and it can continue for two months after, if you are in and out of work, to ensure continuity. How does it work in terms of those comments about retrospect?
Sue Royston: It is the payment. If you find a job, you then have to find child care. The child care provider will ask you to pay, say, £800, and you then have to pay that up-front and report it to the Department for Work and Pensions. It will then pay you back, but it will not pay the full 85% of £800; it will only pay 85% of the amount of child care you have had by the time the next payment comes.
So in effect, by the time the next child care payment of another £800 is due, you still have not had enough money to pay for that, so you are going to need to borrow a second amount of £800—or £600, because you have had one week’s money—before you finally get 85% of £800. So you will continually have to be borrowing money in order to pay your childminder to report your costs so you can then get it back.