The Spending Plan policy 8: scrap the childcare subsidy programme named “tax-free childcare”

Each day we are publishing a blog on one of the policies from our Spending Plan. Click here to read the previous policy.

Under this scheme, the government will pay 20 per cent of the cost of childcare up to a maximum of £10,000, leaving parents to pay the remaining 80 per cent. With no more justification beyond the fact that 20 per cent happens to be the same number as the basic rate of income tax, the government branded it as “tax-free childcare”. The benefit parents receive is the same irrespective of whether their marginal tax rate is 20 per cent, 40 per cent or 45 per cent. In fact, the money is paid even if the parents are not even taxpayers. But the deceitful name is not why the subsidy should be scrapped.

This scheme does nothing to tackle the root causes of the high costs of childcare (see section 2.1.5 of the Spending Plan for further discussion), which are largely down to government policies in the first place. Things like heavy regulation of qualifications and stringent staff-to-children ratios have made childcare extremely expensive. But while it does nothing about the costs of regulation beyond transferring some of them from parents to taxpayers, it will cost an estimated £900 million by 2018–19. Over lifetimes, there is a large overlap between parents and taxpayers as groups of people, highlighting the wasteful and unnecessary “fiscal churn” that schemes such as this represent.

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