Thanks very much for coming. You said in your written submission that you had some concerns about the design of the Bill. By way of introduction, could you talk to us about some of those concerns, and then perhaps about some of the benefits of the Bill if you want to?
Dr Stewart: Okay, sure. First, in terms of the benefits, I can see that, on the surface, it is nice and clear; it is easy for parents to understand. The idea that other family members can pay into the system and have those payments topped up is attractive. On the surface, the 20% across the board idea is nice and easy to get across, and it is neat that that is the tax-free element you get.
However, when you look at it and think about the implications of it, it is a poorly designed policy—even if you think about it just in the narrow terms of saying we are going to use demand-side subsidies to try to improve the affordability of child care without worrying about quality, for example. I am a strong believer in the idea that we should do much more to integrate our policies to improve affordability and quality. I am disappointed that we are going to put more public money in without thinking more tightly about quality.
More specifically on the design, I have two concerns. The first is that the way it works out is not very progressive; it is channelling more money to the people in the top half of the distribution. That could easily be changed just by changing the design. If you are giving a 20% flat-rate subsidy, that sounds kind of fair, but it is a 20% rate up to quite a high maximum—£10,000—so you only get the full benefit of £2,000 if you are able to spend £10,000 on child care. We know that, for many families, that is way beyond what they are able to do; they are maybe juggling a bit of formal care with grandparents and so on, and they are not going to be able to take the full benefit. For example, in the existing employer scheme, if a basic rate taxpayer spent £2,913 on child care, they would benefit by £930 a year. To get that £930 under the new scheme, they would need to spend £4,650. So this is going to leave families who are currently paying for fewer hours, and maybe paying for lower quality because that is what they can afford, in a worse situation, while channelling money to people right at the top of the distribution, who can afford to spend £10,000. That is my first concern.
It would be very easy to shift that. All you need to do is to have a higher subsidy up to a lower cap. The existing scheme is, effectively, 38% subsidy, because it is tax and national insurance, and it goes up to a lower cap. You could have 40% or 50%, but you could say, “We’re only going to fund the first”—
Dr Stewart: Yes, up to £6,000. You could adjust that very easily.
My second concern is really about these demand-side subsidies in general. I think these are going to do exactly the same thing. We are not confident that this is not just going to lead to price inflation in child care fees. Parents have more money in their pockets, and child care providers can charge more. We do not know even that that extra money is going to go into quality; it could go into profits—we don’t know. Again, that is something you could adjust for. One way to do that would be to introduce some sort of cap on fees. Some countries do that; Norway, for example.
I think it would be less draconian if you made the subsidy a maximum per hour rather than on the total. So instead of being able to just go and spend up to £10,000 on however many hours it is, you would work out what a reasonable hourly fee was and say, “You can only spend this on a certain number of hours, and it is only going to be up to £7 an hour”, or whatever it is. The Netherlands does that, and Australia does that for part of its system and is shifting to do it for the whole system for precisely this reason; they are worried that the subsidies that they have are just boosting inflation. In the Netherlands, that seems to keep a cap on fees. It is like a soft cap; instead of telling providers they can only charge £7, you say that you will only subsidise the first £7. That means providers have to think hard about whether they want to say to parents “We are going to spend more because it is higher-quality, but you are going to have to pay for the whole of that yourself.”
Okay, that’s great. Can I just probe you a bit further on a couple of those points? We have heard some other evidence that suggests that price inflation is a strong possibility given that we would be pumping demand without addressing supply issues. I know you have done a lot of work internationally on these types of model, so could you expand on what evidence there is that the kind of model that the Bill will bring in is very likely to lead to price inflation? Over what kind of period do you think that the effects of the Bill would be negated, if at all, through prices going up?
Dr Stewart: Yes. Some evidence that we have seen, certainly for the UK, suggests that as you see the working tax credit become more generous, you see the fees going up. I have not seen any robust evidence, because it is difficult to do because you have no counterfactual about what would have happened to the child care fees. There are more studies in Australia, but they certainly suggest exactly the same thing; as the subsidy goes up part of it, maybe not all of it, is offset by fee inflation. I can give you some references.
You gave some examples of international comparators that have schemes that stop that from happening. You said in your opening about this being a missed opportunity to put alongside the extra subsidy some more caveats around increasing quality. Where should we be going with public subsidies? How might that work? How might we amend the Bill to bring that into effect?
Dr Stewart: I think there are two sorts of thing that we could be doing, and one is maybe en route to the other one. We could be much stricter with child care providers. We have a system where we have private and public providers, and I do not think we are going to move away from that, but we could be making much higher demands of our child care providers. Perhaps not immediately, but we could be saying that in five years’ time we are going to be much tougher about the sort of qualification requirements you need to have. That is really important.
In some countries, for example Norway, where private providers are part of the system, if they want to receive public subsidies they have to open their books and have them inspected. They are allowed to make reasonable profits, but there are restrictions. If they are spending much less on staff than other public providers, there are questions asked about whether their profits are reasonable. We have the whole Ofsted framework, and at the moment we do not consider inspecting anything like that, but I think that if we are giving providers public money, then we could be making more requirements on staff qualifications. Part of that might be looking at profits and putting some sort of restrictions in place on those. Currently, what we are asking is very, very limited. We are quite tough on ratios, but the qualification requirements are really very low. When we look at other countries, it is kind of shocking that they are so low and that we are happily putting public money into settings that really are not necessarily giving good provision for children—some of them, although I know there is a huge variety.
The other, more immediate thing would be to link funding more directly to qualifications, and that is harder to do with demand-side subsidies. I have thought a bit about it. With supply-side subsidies it is easier to link the money more directly to the qualification levels. It is no good just telling providers, “Right, you’ve got to have a teacher.” You need to provide them with some incentive and the ability to do that. I think the funding system—actually, I think this is true for the free entitlement funding as well—does not currently do that. So if a provider wants to improve quality and take an extra graduate on, they have no way to do that within the flat-rate funding system. The only way they can do that is by passing that cost on to the parents.
I think we should be designing the system so that you do not just get a flat rate, but you get a bit more if you are providing higher quality. I feel that there would need to be a separate pot, actually. I cannot quite see how—doing it with demand-side subsidies is messy. I think you would then need to say, “Here’s your money—your 20%—and then here’s another pot that you can draw on, if you are going to take someone on”—like the graduate leader fund used to do, actually. It is not so different from things that we have had.
Just to link up some of those points, what is the international evidence on the model that the Bill brings in, which is a totally demand-side subsidy, with no strings attached? What is the evidence about what that would do to the supply of places and to quality, if anything?
Dr Stewart: I think it is probably better at increasing the supply of places than doing anything about quality. The whole idea is that it is like a child care market and that quality will kind of bid up in a market, so you do not need to worry about quality, because parents will want that and they will go out and look for it and they have a choice. In practice, we do not see that. The Netherlands has experimented with a very market-based system. You do not see a market leading to quality being bidded up.
I suppose it is a funny kind of market. Often parents do not have much choice. You have just got a couple of places in your local area, and you often cannot observe quality effectively as a parent—there is an Ofsted report every four years and you go on a visit. It is hard to know, really, what is going on. Also, you do not pull your child out of a setting once they are there, so it is not a market where people swap around. Things have to be quite bad before you will take your child out.
Those are probably reasons why, in this case, the market does not seem an effective way of guaranteeing quality. Whenever we see quality improvements, it is because Governments have regulated and said, “This is what you have to do.” That is when you get qualifications improving, and other forms of quality. I think you can have a market, but if you are worried about quality, which I think we all should be, it needs to be a very regulated market, and we need to assume that it is Government regulation that is driving quality.
Personally, I do not think of child care as a market, in the same way as the market for lots of other services and goods, because there are very local markets and in some areas there is no market at all. You might not even have a nursery, let alone a choice of nurseries, or there might be little choice, so it is quite hard to run a market system on that basis.
Can I challenge you on a couple of points, so that I understand exactly what you are saying? First, on the maximum limit of £10,000, I perfectly understand what you are saying about the fact that not everybody can afford £10,000. However, when we talked to providers in previous sessions, they said that, actually, this cap barely covers the going rate in some parts of the country, particularly in central London. So if we were to reduce the upper cap in the way you suggested, we would deprive a lot of people who can just afford to have provision in London with the assistance of this scheme. We would basically be saying, “You can’t have it. We’re not going to provide anything for you. You will not be able to buy provision in London without a deep incursion into your own pockets.” That, to me, is not helping moderately paid families very well. I am challenging you to say, is that not a flaw if we are already at that £10,000 level? That is not the case in some parts of the country; in Somerset, we will not be paying that sort of amount, if we can get a nursery at all, but in London, people are.
Dr Stewart: I suppose it does depend. If you think that what is driving differences in what parents spend is things entirely beyond their control to do with regional differences, then you are right: it makes sense to say, “Let’s give the money to the ones who are being forced to spend more.” You are right that, presumably, an element of what is happening is about that, but I would argue that a larger part of what is driving differences in what parents spend is their ability to spend more.
Dr Stewart: But that is a slightly different question. That is the going rate, but many low-income parents who do not have £10,000 will be using a childminder rather than a high-end nursery, they will be using part-time hours and they will be using their neighbour or their mother to cover the extra half of the week.
That does not alter the fact that there are people who would, under this scheme, be able to just afford the £10,000, but if you bring the cap down to £6,000, they would not be able to afford it.
Dr Stewart: I am not saying that you just bring the cap down. I agree—I am not sure that that would help. You would need to bring the cap down and increase the percentage of the subsidy. We have a 20% flat-rate subsidy up to £10,000. If you have a 40% flat-rate subsidy up to a lower cap, you are making sure that the lower earners are also covered.
Can I deal with the other area I want to understand—cost inflation and whether a soft cap is effective? Can I put it to you that we have this in the provision of elderly care, where the local authority sum is way below what it actually costs to provide the service? It is a national scandal that that is the case, but, nevertheless, that is the case. The effect is to increase fees for anyone who is not totally provided for by the local authority. Far from capping, the arrangements have actually increased the cost to those who are paying from their own pockets, so somebody who is just over the threshold for a total local authority reimbursement loses out. Would the same not apply in this instance?
Dr Stewart: I think we would want to work the cap out. If the cap was at a ridiculously low level, it would have no effect at all, so it might be to do with where we set the cap. In Australia, they are working out what a reasonable cost per hour of child care would be. Actually, this would be an area where you could have regional variations, so you could say, “In London, the cap’s higher, so we’ll subsidise up to £10 per hour” or whatever it is. That could be a way of building in differences by region. Certainly, the evidence from the Netherlands and Australia is that, as long as the cost is at a reasonable level, you can provide a decent service. In the Netherlands, about three quarters of providers are using it—it is their fee—and then you have some higher-end providers who are prepared to say, “No, we are going to provide more. We provide an organic lunch,” or whatever it is. However, what they are providing is much more explicit and transparent.
One element of the child care payments scheme that differs from the current voucher scheme is the per-child element. What are your thoughts on that? You have proposed a number of ways in which the scheme could be made more progressive; how would that fit with the per-child element? You were talking about a potential cap per hour—would that be per hour per child, or per hour in terms of the total spend that an individual worker would incur? Also, how does it compare internationally? You mentioned Denmark; have other countries gone down the road of looking at it per child rather than as a household spend on child care?
Dr Stewart: That is a good question. You could do it either way. I think that the per-child aspect is a nice element of the Bill. Lots of countries do not do it this way at all; they do it through supply-side subsidies direct to providers and then through income-related fees. I think the Netherlands and Australia have really good models of demand-side subsidies.
One of the benefits you mentioned was the simplicity, but when it comes to the per-child element in certain settings, it potentially gets much more complicated. We took evidence from the nannies’ association, and it is obviously not clear at all how the funding would be allocated to a nanny who looked after three or four children with slightly varying child care requirements.
Going back to your comments on quality, the nannies expressed particular concerns that, although Ofsted registration will be encouraged as a requirement for the receipt of funding, that will not actually do anything to improve quality. What are your thoughts on how you would go about improving quality in that setting and also for childminders, where they are required to Ofsted-register but there are concerns that that will not reflect any improvement in quality?
Dr Stewart: I have not thought very much about nannies, but certainly for childminders there is a good model from New Zealand, where a childminder will be linked in to the equivalent of a children’s centre type of thing, and they have what they call a home educator—like an early-years teacher. That person oversees a group of childminders and is responsible for bringing them together and ensuring that they are getting support in that way, but they also visit at home in between, so that it is not just an Ofsted visit every four years. I would like to see level 3 qualifications for childminders—that could be a requirement—but I also think that there are ways to link childminders to other qualified professionals to provide them with support.
I want to touch quickly on the administrative side of things, although that may not be an area that you have looked at. One benefit of the current voucher scheme is that the employer takes on quite a lot of responsibility for administering the scheme—obviously, the parent has to engage in the process to some extent as well.
The measures in the Bill switch that responsibility entirely on to the parents. Concerns have been expressed that parents will potentially be without any support from the employer because employers are no longer engaged with the scheme. What are your thoughts on that? Also, what are your thoughts on the three-monthly enrolment requirement that is being discussed? That might not be your area of interest.
Can I come back to the exchange you had earlier with David Heath, so that I can clarify it for myself? We had evidence from Julian Foster of the Child Care Vouchers Association earlier this week. He said:
“The average child care spend, according to the Department for Education’s own statistics, is just over £5,000 a year.”––[Official Report, Childcare Payments Public Bill Committee, 14 October 2014; c. 32; Q32.]
My understanding was in respect of an argument for a differential response. A higher threshold of response with people claiming only up to, say, that amount, would allow those people to access support at a quantum similar to the amount for people claiming beyond that amount, up to £10,000. Have I got that right, or have I misunderstood?
Dr Stewart: Yes, I think so. I guess I was saying that if you want to keep it really simple and flat rate, raise the percentage higher for everybody but have the cap lower, so that you get support only for the first x thousand pounds, where x is much lower than 10. I think you are saying a slightly more sophisticated thing, which is that you would have a higher percentage for people on lower incomes. You might pay 50% or 60% up to a certain amount and then you would pay only 20% above that. Is that right?
Dr Stewart: By varying that percentage, you are obviously going to be much more progressive. There is a big leap from universal credit, where people can get 85%, suddenly down to 20% for everybody. In the Netherlands, it varies from the lowest earners, who pay 3% of the total cost, to the highest earners, who pay 66% or 67%. They are more generous to everybody, but they have a sloping scale rather than a flat rate. Of course, you start to move away from simplicity, but in terms of reaching the people who I think will be most affected and who need it most, the system is more effective.
Okay; that is very helpful. You mentioned universal credit and tax credits. How do you see this working for people who are moving between universal credit on the one hand and tax-free child care on the other? Do we need to think a bit more carefully or is it going to work fine?
Dr Stewart: I think it is going to be messy and confusing for parents. It would be ideal to have one system for everybody. Of course, there are going to be people in this grey area—“Which one should I apply for?”—who are moving from one to another, and that is an unnecessary stress and difficulty. Universal credit is universal so no one is going to want to take the child care element out of it, but I think it would be preferable to have a scheme that applied to everybody.
I am a big believer in the universal. I know that I am arguing against giving all this money to people at the top of the income distribution, but in general I am a big believer in universal policies, because for intrinsic reasons I think that we should be providing support for all children, but also because, instrumentally, it is good to get away from a divide between what the poor people get and what other people get.
The interesting thing about this combination is that we are giving all this money to the top. We have the costs of a universal-ish policy, but are not even having the benefits, because we are still dividing people into, “This is what you get if you are a poor person on universal credit and this is for everybody else.”
Can I take you back briefly to the exchange with my colleague David Heath? He referred to the evidence from a previous witness, Katie O'Donovan from Mumsnet, on the question of whether better-off people generally have more expensive child care than the rest of us. She had looked at the evidence and could not find that other than in the case of the very highest category of earners, who might be able to afford their own nannies and so on. In the case of middle-income people, the same kind of child care was generally found across the board. On the issue of whether you should differentiate, she said:
“If people are paying for a full-time nursery place in London, or in about 25 local authorities that the Family and Childcare Trust looked at, then they are paying £10,000 a year”––[Official Report, Childcare Payments Public Bill Committee, 14 October 2014; c. 45; Q91.]
We did research in my own constituency of Newark in the east midlands, where the average is lower, but it is still £7,800. It is by no means a wealthy area. Do you not worry that your suggestions today cut out a key group of people who are not top earners but are essentially middle earners? When you refer to the top of the income distribution, you really mean the second half of the income distribution. Those are key people who we want to get back into the workplace, because they have a lot to contribute and will potentially pay a lot of tax to the Treasury later in their careers.
Dr Stewart: It is an important point. This is about spreading that money. I am very annoyed at my co-author because we are supposed to be writing a paper exactly on this, so I will go back to her and say, “Where are our tables?” If she has them, I will send them to you. Those tables tell us what people spend on child care across the income distribution. That would provide some light rather than heat.
It is a mistake to think that just because the cost of a full-time place is x, that is what people are paying. I know that there are people who cannot afford a full-time place and so are going for a half-time one. Let us assume that we are going to leave the pot as it is. All you are doing is spreading the money out; it is a bit like free entitlement, in essence. The free entitlement gives everyone 15 hours free. You are not discriminating against the richer people because you are only giving them 15 hours; you are ensuring that everyone gets their first 15 hours free.
If you assume that people who work part time or who use less formal child care are on lower incomes, you are giving everyone that starting point. If they then want more, they pay for more. To really make a difference for the middle-income earners you are talking about, we need to put more money into the pot. If this is our fixed pot, spreading it out so that everyone is able to access a certain number of hours at the lower rate has to be a fairer way of doing it.
What you are talking about is very attractive, precisely because it will still include a hefty subsidy for the vast majority of what we might describe as middle England. For example, someone might spend £10,000 a year on a full-time nursery place—that might be the case if you were in middle England and had one child. It would certainly become very prohibitive if you had two children and were spending £20,000 to get the full subsidy.
Under this scheme, you would get the maximum subsidy of £2,000 a year. However, under your proposal of 40% or 50% of £6,000 a year, you would still pretty much get £2,000 a year, if not more. The people that my colleagues are talking about would get exactly the same benefit that you are describing. You would presumably have to take something off the people claiming £10,000 a year—
Dr Stewart: You would have to do the maths, but I think it would be much fairer. The only people I am worried about are those that Mr Heath mentioned. There is an issue if you are living in a very high-cost area. That is why I like my hourly subsidy idea, because it would be a very easy way to work out the regional hourly cost and adjust it.
Yes, and you would have to look at that. We have to be careful about exactly what we mean when we ask, “Do rich people have more expensive child care?” because there are two definitions of that. I spend £54 a day on the nursery for my daughter, but most people in my constituency spend £28 a day on child care because that is what they can afford. You can do two different things: spend a higher hourly rate or use more.