Examination of Witnesses

Childcare Payments Bill – in a Public Bill Committee at 2:00 pm on 16 October 2014.

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Spencer Thompson and Vidhya Alakeson gave evidence.

Q 192192

Photo of Anne Main Anne Main Conservative, St Albans

Good afternoon. We have until 2.30 pm for this panel. We are going to hear evidence from the Institute for Public Policy Research and the Resolution Foundation. Just for the benefit of Hansard, could I ask the witnesses to introduce themselves and say whom they represent?

Spencer Thompson: I am Spencer Thompson. I am from the Institute for Public Policy Research where I am a senior economic analyst.

Vidhya Alakeson: I am Vidhya Alakeson. I am the deputy chief executive at the Resolution Foundation.

Photo of Anne Main Anne Main Conservative, St Albans

Thank you. It is quite echoey in here. You might have to speak up a little for some of our less well hearing Members, myself included.

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

Spencer, Vidhya, are you okay with us using your first names?

Spencer Thompson: Yes.

Vidhya Alakeson: Yes.

Q 193

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

First of all, by way of introduction, would you like to say a little bit about any general points that you want to make about the Bill and any concerns you might have about the way it will work.

Vidhya Alakeson: We acknowledge that there are some improvements in the Bill through the creation of tax-free child care compared with the current employer-supported voucher, the fact that it is not related to what your employer chooses to do but is available to all parents, and the fact that is available to the self-employed. We have three areas of concern. One is a very broad concern and is perhaps beyond what the Bill Committee can address: at a point of ongoing austerity, is this an effective use of a large amount of public investment in child care? We have questions about the extent to which it will deliver much in terms of change of behaviour in the labour market and so on.

More specifically related to the Bill, we are concerned about the lack of parity that there will be between tax-free child care and universal credit child care support—for example, we are concerned about the number of children that can be claimed for under tax-free child  care compared with universal credit. Thirdly, we are concerned about the complexity for those moving between the two systems. Approximately 100,000 people are estimated to move between the two systems each year. To what extent will they be able to understand which system they should be in and how they will be better off? As 50% of children and families will qualify for universal credit, there will be quite a substantial move between those two systems, particularly where you might have another child. You might be in tax-free child care, have another child and then move into universal credit. Those changes are going to be incredibly difficult for people to understand, and I do not really think we understand the complexity of what a clash between the two systems will create.

Q 194

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

Did you have a third point?

Vidhya Alakeson: No, that was three.

Spencer Thompson: I would echo what was just said and add on a couple of points. With any kind of large-scale injection of public funds into a mixed market, such as the child care market, there is a bit of a risk that you could see some cost inflation as a result of extra money being injected. That has definitely been the case in a couple of other countries that tried similar measures to make child care tax-deductible—for example, Australia and the Netherlands. Going forward, we hope that the Government will take an active role in monitoring how child care price inflation proceeds following the introduction of tax-free child care. We also think that there is a case for detailed research to be done on the interaction of public investment in child care via parents with how child care providers set prices.

The second point, which echoes what Vidhya said, is about the interaction between tax-free child care, child care support and universal credit. The way in which tax-free child care is going to be administered is probably the superior of the two, in the sense that you pay up front and then receive your top-up, whereas I believe in UC, as in tax credits, it is the opposite—you pay and then claim back. We would favour a closer integration of the two systems that follows the tax-free child care administrative model.

Q 195

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

Both those contributions echo a lot of the evidence that we have heard so far. Vidhya, can you expand on your first point about the use of public funds and whether it is progressive enough in terms of what is available? We had a healthy debate earlier when we took evidence from Kitty Stewart, who suggested that you could possibly make the scheme more progressive by lowering the cap but increasing the percentage. There was some discussion about that. What are your thoughts on progressivity and measures that might make things more progressive?

Vidhya Alakeson: Our analysis shows that 80% of families that will benefit from tax-free child care are in the top 40% of the income distribution. The evidence on how parents respond to child care investment is reasonably limited, but we know from self-reported surveys that parents with a family income of more than about £60,000 a year are not predominantly making work decisions and suchlike on the basis of the affordability of child care. The vast majority of this funding is targeted at those families, which suggests to me that you  are unlikely to see much of a change in behaviour, but you will get a cost shift from parents to Government, rather than an increase in hours or more people going into work. It is clearly not progressively targeted—it is targeted at the top half—and I would very much agree with Kitty’s thoughts that other countries tend to support a higher percentage of child care costs, and that you are therefore more likely to get an impact. Internationally speaking, 20% is not a very high percentage of costs to cover. For example, Australia would cover 50% of costs. A lower eligibility threshold and a higher percentage of costs would have a bigger impact.

Q 196

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

We had quite an argy-bargy about where the threshold might sit. Say the amount of money available was the same, have you done any work on what the cap and therefore the percentage would be, and what the benefits would be?

Vidhya Alakeson: No, we have not, unfortunately.

Spencer Thompson: I have not dealt with that specific point, but some of the modelling we did looked at this kind of issue. We said that you could potentially consider limiting the number of hours for which you could claim. The chances are that if you are going to be using your full entitlement, you are talking about children being in care for quite a significant number of hours a week. You could limit it to a full-time place, which would be something in the order of 35 hours, which for three and four-year-olds could potentially be 20 hours, because there is the 15 hours free entitlement. If you did that, you could potentially increase the proportion of cost shares by, say, 10%, without having to inject any extra money.

Q 197

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

It would be great if you send that work to us. You were talking about price inflation. That is something we have been discussing as part of the oral evidence. Could you expand a bit more on some of the work you have looked at? What do you think the evidence points to in terms of the Bill’s impact on price inflation? Over what sort of time frame, therefore, do you think the extra subsidy would be negated for many families?

Spencer Thompson: It is difficult to put specific numbers on those. We are generally talking about a policy where the maximum amount claimable is somewhat fixed and not expected to be uprated with inflation every year—that is probably a good idea. If it was uprated with inflation every year, there is a chance that some large providers might potentially game the system. I mentioned international examples such as the Netherlands and Australia, where they introduced a form of tax-free child care and also increased the proportion that could be claimed back some years into the policy, so that you could track that against the inflation of child care prices and there was a clear relationship between the two. No one has done any detailed work on or rigorous analysis of that in those countries, but some smaller-scale studies have been done in the US that looked at child care vouchers in a couple of individual states and found some evidence of a link between child care inflation and the introduction of a child care voucher.

Essentially, our concern would be that, when you are talking about injecting a lot more money into the system, providers can use that, often justifiably, as a way to either become profitable or become more profitable  because they see that there is more purchasing power and can then increase their prices accordingly. The danger over some time horizon—I do not think we can be specific about that—is that child care providers raise their prices and eventually you find that the value of the extra money inherent in tax-free child care is eroded. That is one of our main concerns about this kind of demand-side subsidy.

Q 198

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

Are there any amendments to the Bill as it stands or models we could look at that would not prevent that happening totally, but mitigate it?

Spencer Thompson: The IPPR has called in the past for some form of cost capping on providers, where they have an annually negotiated limit on the amount of inflation they can put into their child care prices. That policy is very much outside the scope of the Committee. We see that more in the context of reinvesting money that is currently spent on child care through things such as tax credits, and money that will be spent through tax-free child care, into more of a supply-funded model, where you reinvest the money down from local authorities or directly to providers in order to fund child care provision.

Q 199

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

You both raised the point about the interaction of universal credit with tax-free child care. Again, it is something we have explored with other witnesses. Perhaps you could expand on your concerns a bit further for the purposes of the Committee. You both produced research to say that a lot of families on that borderline find that their ability to enter the labour market or take on more hours is significantly affected by child care costs. Perhaps you could tell us what you think the solutions are for that interaction problem and how we might overcome it.

Vidhya Alakeson: The real issue is the risk that the complexity of that interaction might undermine some of the benefits that the simplification of universal credit is attempting to create. At some point in the system, you are going to be very unclear about the best way of claiming your child care support. It is unclear how families will receive information and do a “better off” calculation between tax-free child care and universal credit, but that could be addressed. Ultimately, the two systems are seen as separate at the moment when, in reality, they will butt up against each other. At some level, there needs to be a review of how that interaction is going, because it is very hard at this point to conclude definitively what will happen.

Q 200

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

One suggestion that I think the Children’s Society made was allowing, or at least leaving open at this stage, universal credit recipients to open up a child care account so that they may be able to transition between those systems better. What do you think about that?

Vidhya Alakeson: I think that could potentially be helpful if it was at no cost to the parent. I think the information point is really important and keeping the system as simple as possible to reduce the barriers to entering and progressing in work. What you do not want is people feeling fearful about what is going to happen with their child care costs as they start to increase their hours and earn more, so providing that clarity of information is going to be really critical to managing that interaction.

Q 201

Photo of Lucy Powell Lucy Powell Shadow Minister (Education)

Spencer, do you have anything that you want to add to that?

Spencer Thompson: No.

Q 202

Photo of Chloe Smith Chloe Smith Conservative, Norwich North

Thank you both for joining us today. May I ask about your views on having a single provider, National Savings & Investments, and also on Her Majesty’s Revenue and Customs having the various enforcement and penalty powers? On that latter point, there are changes to what currently happens under the employer-supported child care system. Can you start us off with any reflections you have on either the provider, NS&I, or the HMRC regime?

Vidhya Alakeson: We are quite supportive of the single provider solution; it seems to be one way of simplifying the system for parents. It was unclear whether choice of voucher provider or choice of tax-free child care system was really adding much in terms of parental choice.

In terms of the policing and enforcement of the system, one of the questions I had, which links back to the parity with universal credit, was about the employment test and the extent to which that can realistically be policed. In universal credit, it will be tightly controlled and the real-time information feed will allow people to manage that very clearly. It is unclear to me how, in a tax-free child care system, that could actually be enforced. That feels like a lack of parity and an issue if this funding is supposed to be targeted at families where both parents, or the single parent if there is only one, are at work.

Spencer Thompson: On the first point, we agree with Vidhya in the sense that we are in favour of the single provider system. It seems to me that the market for child care vouchers of this kind is probably a natural monopoly, or close to one, so that makes sense to us. Where there is perhaps a slight risk in moving from the employer-supported child care system to the current one is that a lot of employers have less to offer their employees from such a voucher system because they have seen their role reduced or removed. Perhaps there is a case for some kind of employer involvement where they could host something on their website, intranet and so on that links up more with NS&I as a way of maintaining their involvement, which is valued by them and their employees. We think some form of employer involvement—completely voluntary—should be considered.

On the other side of the equation, we would again agree with Vidhya that there is not a terrible amount of detail about exactly how HMRC is going to perform these various tests. We would definitely like to see more information on that.

Q 203

Photo of Chloe Smith Chloe Smith Conservative, Norwich North

Do you think there are any comparisons with other parts of public services and HMRC’s powers that we ought to consider? For example, penalties for incorrectly filling in forms for an application for other benefits.

Spencer Thompson: Nothing in particular. I do not think you should necessarily be penalised. As far as I am aware, within tax-free child care, if somebody tries to set up a child care voucher account when they are in receipt of universal credit and they say they are eligible  for tax-free child care, that can then mean they forfeit their UC claim, which sounds slightly severe to me. I do not know whether that is still the case in the Bill as it stands, but I would be concerned about that.

Q 204

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I want to explore the issue of maternal employment. I think Spencer has particularly researched that, but I am sure both of you will have comments to make. Sorry, have I got it the wrong way around?

Vidhya Alakeson: Both of us.

Q 205

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Both, fine. You mentioned a figure, Spencer, of a £60,000 joint income as the point where you stop taking—

Vidhya Alakeson: That was actually me.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Sorry. It was household income. In terms of maternal employment, it would be important to extrapolate that a bit. Obviously you could have one earner earning a lot more than the second earner—often it is the mother. So that decision to go back to work starts to look more and more economically unviable when you feel you will spend your entire salary on child care.

Although ideally all households should psychologically split that figure, it does not always work that way for a lot of women. I am interested in the figure that you gave but more generally I would like to know whether the Bill will support more maternal employment—we know the figures in this country are poorer than international comparisons—and if not, how we can improve it.

Vidhya Alakeson: I will kick off, but I know that Spencer has done a lot on this. That figure is from a report from the child care commission, set up by the Department for Work and Pensions, that concluded last year. It was a perception survey. It asked parents what they thought they would do if child care was substantially subsidised. The evidence of what parents do does not give us very strong indications of where that income threshold is. That is the best we have to go on.

We have done other surveys. For example, we published one with Mumsnet at the beginning of this year; it was not a representative survey, but it involved a large number of mothers. It had a similar finding: women lower down the income distribution felt that they were much more likely to change their behaviour as a result of child care subsidies. That is why there is concern about whether this policy really will deliver for maternal employment, given that the vast majority of the money is going to those in the top 40% of the income distribution and the remaining 20% is going to those in the middle.

My suspicion is that the policy will not do a huge amount because the vast majority of people at that top end are not making choices around their work decisions based particularly around child care affordability; many are choosing to work the hours they do because it is a personal choice about how to balance their work and family. I would be more confident of bigger impacts if the money was more heavily targeted at those who were more likely to change their behaviour because they were financially constrained—those in the bottom of the income distribution.

Spencer Thompson: I would echo a lot of what Vidhya has said. Generally speaking, it is those towards the middle and upper portions of the income distribution, in terms of families with young children, who end up spending the biggest proportion of their income on child care. You are right in saying that that is very concerning. Some of the perceptions evidence suggests that it may be having an effect on maternal employment. Generally, the evidence on maternal employment and the price of child care is very mixed. It is hard to draw firm conclusions from that literature.

When you look across countries, generally speaking northern European countries do quite a good job in limiting the price of child care as a proportion of family income down to somewhere in the region of 10% or 12% of their incomes. In the UK, if you are talking about a middle-income family, the kind that would probably be supported by tax-free child care, their child care costs are more in the region of 20% to 25%. There is a definitely a concern there. You can almost see tax-free child care as being not just something that is supposed to support maternal employment but as a support to living standards in the middle of the income distribution. Viewed in that light, there is a case for injecting funds into the system in this way.

Q 206

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Is there more of a supply-side system of support for child care in the Netherlands that keeps those prices down or is it similar to the tax-free proposals that the Government are putting forward?

Spencer Thompson: The Netherlands is quite an interesting case because that is more of a UK-style system—

Spencer Thompson: It is typical of the tax-free child care proposals and it has gone more that way in recent years. The IPPR has looked at lots of different countries’ systems. We are particularly interested in the Scandinavian countries, particularly Denmark, Sweden and Norway, and also in some others.

Photo of Anne Main Anne Main Conservative, St Albans

We have two more questions to get in and only six minutes.

Q 207

Photo of Mary Macleod Mary Macleod Conservative, Brentford and Isleworth

I just want to press you on whether the Bill will get more people into work. You have both said that the Bill improves the current situation; I am interested in entrepreneurs and helping support the self-employed. Do you see this as an approach that will help in making the decision—perhaps largely for women—to get back into work? Linked to that, there is talk here about those who are not in tax, but are you positive about the fact that we have taken the most poorly paid out of tax?

Vidhya Alakeson: In terms of whether this will help entrepreneurs and self-employed people, I will go back to what Spencer said. It will in the sense that what they are currently paying out of pocket will now be partly subsidised by the Government. I am not sure whether it will have a big impact on the behaviour of people who are currently not working or working short hours. Therefore, in a cost of living sense—

Q 208

Photo of Mary Macleod Mary Macleod Conservative, Brentford and Isleworth

What makes you say that it will not change behaviour?

Vidhya Alakeson: Because it is targeted at the top end of the income distribution where most people do not make choices based solely on their finances. They are choosing to work part time because their child is under five and they want to stay at home and look after them some of the time; I do not think that a 20% subsidy of child care costs will significantly change that behaviour pattern. That is what some of the surveys suggest: people on higher incomes are not financially constrained in the same way and, therefore, the behaviour change is likely to be less. We have relatively limited robust evidence about the impact of child care subsidies on maternal employment supply, but, drawing what we have together, that is what I would assume.

In terms of taking people out of tax, we have argued quite strongly—and we are about to again—that if you really want to focus on the lowest income households, more funding for the work allowance and universal credit would be a far more targeted and progressive policy.

Photo of Anne Main Anne Main Conservative, St Albans

If you have further points to inform the Committee about, it would be useful if you sent them in.

Q 209

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons)

Has sufficient provision been made for women on both paid and unpaid maternity leave in these arrangements? Are there any issues relating to that?

Spencer Thompson: In terms of when they are looking to move back into the labour market, many of them will have a job to return to; this money will kick in and be really useful to them when they do decide to do that.

Obviously, there is still a gap between the end of maternity leave and the start of the free entitlement at the age of three, or two for some families, and there is no differential rate depending on the age of the child—as far as I am aware, that has not changed. Therefore there is still a lumpy age profile as to how the funding for tax-free child care works. In that sense, there is a concern, because this does not offer any extra support to people who are in that crucial period between the end of maternity leave and the start of the free entitlement.

Vidhya Alakeson: I have nothing to add on that.

Q 210

Photo of Anne Main Anne Main Conservative, St Albans

We have a few seconds if you want to add anything to the answers you gave to Mary Macleod.

Spencer Thompson: To come back on the point before, probably the best part about the Bill is that it extends support to the self-employed. That was one of the key gaps beforehand, so we very much welcome that.

On income tax more generally, and particularly for families with young children, we would echo what Vidhya was saying. Especially now that the personal allowance has gone up faster than the rate of inflation for several years, you need to look at other ways to help people and potentially take them out of other taxes, such as national insurance.

Vidhya Alakeson: I have nothing to add on that specific point. The only point I have not made and would like to make is that our final concern is about the increase in complexity of what is already by international standards a highly complex child care funding system. If nothing else, it would be wise to review the extent to  which we are losing efficiency in the public funding of child care by having multiple funding streams. In the transition, that will be even worse.

Photo of Anne Main Anne Main Conservative, St Albans

Order. I am afraid that brings us to the end of our time to ask questions of the witnesses. On behalf of the Committee, thank you very much. If you have any further points you wish to send to the Committee, I am sure Members will be pleased to receive them.