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IFS - More hours, more children, and more spending: early years and childcare proposals from Labour and the Liberal Democrats

The Labour party is proposing a major extension to government support for early childhood education and care (ECEC) in England.

Done well, spending on the early years can be an excellent investment, with benefits for children’s development and the wider economy. However, the Labour party’s proposals represent a significant new cost to the public finances, while the available evidence suggests that the benefits for children’s development and mothers’ employment are likely to be modest. There is also a great deal of uncertainty around both the costs and the benefits; since Labour is proposing large extensions to both the number of children and the number of hours covered by the free entitlement, understanding how the costs, benefits, and take-up will vary by age is crucial, but there is little clear evidence available as a guide.

Policy changes

Currently, the government supports early childhood education and care in four ways.

  • There is a ‘free entitlement’ to 15 hours of childcare for all three- and four-year-olds as well as two-year-olds in the 40% most disadvantaged families (from September 2017, this is due to rise to 30 hours a week for the approximately 390,000 families of three- and four-year-olds living in two-earner or single working parent homes).
  • The tax credit system supports disadvantaged families with childcare costs through the childcare component of Working Tax Credit and Universal Credit.
  • Working parents are eligible for childcare vouchers through their employer that are not subject to income tax or national insurance contributions.
  • These vouchers are being phased out in favour of the tax-free childcare accounts that working parents have been able to use from April, which offer a 25% subsidy on care spending.

All told, the government currently spends about £6.5 billion on childcare through these programmes.

The Labour party is proposing to vastly expand the first of these supports – entitlement to free childcare – and to introduce its own subsidy programme for additional hours of childcare. In exchange, they would eliminate spending on demand-side subsidies – through the tax credit system, childcare vouchers, and tax-free childcare – for children under five (it’s unclear what would happen to the childcare support these programmes offer for older children). In particular, the party is proposing to offer:

  • An additional 15 hours per week of free childcare for all three- and four-year-olds, not just those in working families;
  • 15 hours of free care for all two-year-olds (not just the most disadvantaged) from 2020-21, rising to 30 hours a week the following year;
  • Subsidised additional care over and above this extended free entitlement; and
  • Some free childcare for one-year-olds and extending maternity pay to 12 months in the longer term.

Labour has promised to ensure that these childcare policies would be delivered in high-quality settings with a graduate-led workforce. Since more qualified staff require higher wages, for these quality improvements to be sustainable the rate at which childcare providers are reimbursed would have to rise. Although the party has not committed to a specific hourly rate, they reference a report by the Family and Childcare Trust that suggests that a graduate-led workforce would require reimbursement rates of £7.18 for three- and four-year-old places and £8.62 for one- and two-year-olds. Under current plans, these rates would be £4.88 and £5.39 respectively from September this year, so this would represent a more than 50% increase for providers.

Programme cost

These are substantial changes which would sweep away many elements of what is currently a very complex system of subsidies, effectively replacing them with freely available childcare for two-, three- and four- year olds. All together, the changes to the free entitlement would see at least 400,000 families with two-year-olds eligible for free childcare for the first time and would offer more free hours to another 1.6 million children. If the proposed subsidised hours are offered to all two- to four-year-old children, 2 million families would be eligible for cheaper childcare.

The costs are correspondingly large. By 2021-22, Labour estimates that these programmes would require around £5.3 billion in funding (including additional spending on supporting new childcare places). This would increase spending on childcare by around 70% over current projections.

However, the costs might rise further in later years. First, these figures exclude the costs of offering free or subsidised care to one-year-olds and of extending maternity pay to 12 months. Even the cost of policies that are included – 30 free hours of childcare for all two- to four-year-olds and additional subsidised care – might not be fully captured by spending in 2021-22. The full 30-hour entitlement for two-year-olds will only become available in that year. Since take-up of these free hours is expected to rise for the first few years of the programme, the full running costs might not be felt until the middle of the next parliament. For example, take-up of the current offer for disadvantaged two-year-olds rose from 58% in 2015 to 68% the following year; a similar 10 percentage-point increase in take-up of Labour’s two-year-old offer would imply around £650 million in additional spending each year.

The case for subsidy

The cost of these policies is a good indication of their ambition. Labour’s programme represents a complete overhaul of state support for childcare in England. It would replace a system that largely channels resources through parents with a programme to directly fund childcare providers. It would replace the current patchwork of subsidy programmes with a single system of free and subsidised care. And, most importantly, it would significantly increase the scope of universal benefits for children from the age of 1 to the age of 4.

Evaluating whether these expensive changes would be in the public interest requires understanding the goals that such a major overhaul of the childcare system is intended to achieve.  That might be to improve children’s outcomes, help parents to move into work, or both.

Based on its manifesto, the Labour party appears to be more interested in the first of these goals. It promises that a better-educated early years workforce would ‘improve child development’, while party leader Jeremy Corbyn promised to ‘invest in our young people’ during his manifesto launch speech.

Impacts on children

Existing evidence suggests that the original 15-hour free entitlement had small academic benefits for children, but these didn’t last in the longer term. Labour’s proposals would mean that free childcare would be available from an earlier age (two) for many children and would be available for more hours for three- and four-year-olds. The extent to which this would improve these children’s later outcomes remains uncertain, and will depend on the extent to which families take up the additional hours and the quality of care that will be on offer.

Surveys estimate that only about 63% of two-year-olds use formal childcare – this means that there is scope for Labour’s proposed universal free entitlement to move more children into early education, which could benefit their academic attainment. However, existing research is largely unable to tell us about the “optimal” age to start childcare. While the EPPE study suggests that starting childcare before the age of three is linked to better intellectual development, other studies suggest that starting before age two could actually harm children’s development.

The impact of Labour’s proposals for 3- and 4-year-olds is quite different. Today, 98% of this age group is already taking up their free entitlement place. As a result, if anything, Labour’s policies would increase the number of hours of early education used (rather than the number of children using it). The impact this will have on children is unclear: evidence on the “right” amount of time for children to attend centre-based childcare is limited, and some studies even find that children who have longer days in childcare tend to have worse behaviour.

International evidence suggests that the benefits of childcare are often stronger for the most disadvantaged children, meaning that early education programmes can help to reduce inequalities in children’s development. Unusually, however, the researchers investigating the original three-year-old free entitlement in England did not find larger effects among disadvantaged children than among their more affluent peers. They suggest that one possible explanation for the small impacts of the policy was that the expansion of free entitlement was delivered through childcare providers in the private, voluntary, and independent sector, where quality is on average lower than in the maintained sector.

High-quality care

In this respect, Labour’s willingness to invest in order to bring up the quality of childcare settings is welcome. If done well, it means that the reforms they propose could have larger impacts on children. Labour claims that it would ‘transition to a qualified graduate-led workforce, by increasing staff wages and enhancing training opportunities.’ On the one hand, this would presumably help the sector to attract and retain higher-quality workers. And by moving towards a system of funding providers directly, the government might have more leverage to ensure that the quality provided by all settings meets minimum standards. 

On the other hand, it’s unclear which qualifications and training Labour hopes that early years’ staff will take. While the EPPE study found that childcare settings with more qualified staff also provided better-quality care, the qualification framework has undergone numerous changes since it was published in 2003. More recent research suggests that the link between staff qualifications and children’s academic achievement is weaker now than it used to be. 

Parental employment

Although the Labour party seems to be focused on how early years provision can improve child outcomes, it’s also important to take into account the potential for additional benefits for parental labour supply. Evidence on this is also patchy.

Previous work by IFS and ISER researchers suggests that offering free full-time childcare can help mothers to work. However, these effects are only found when offering full-time childcare (between 30 and 35 hours per week) to a mother’s youngest child. Even then, the gains are small – after a year of full-time provision for their youngest child, mothers were only 3.5 percentage points more likely to be in work relative to mothers whose youngest child was at the end of their first year of part-time entitlement. This means that extending free childcare from 15 to 30 hours for one cohort of 690,000 four-year-olds moved 12,000 mothers into work.

The expected effect that offering full-time care to a two-year-old would have on her mother’s chances of being in work is unclear. On the one hand, parents of younger children are more likely to prefer to look after their child themselves or use help from family and friends. Almost half of parents of two-year-olds who are not using formal childcare say that this is because of their preferences (compared to around 27% who cite cost as the biggest obstacle). We might expect that making care freely available for to these families would, at least in the short run, do relatively little to change their preferences and move these mothers back into work. 

On the other hand, extending the free entitlement to two-year-olds might have larger effects on mothers’ employment than at older ages. By providing childcare support earlier on, it would help mothers to return to work sooner, which could make it easier for them to find a job. A shorter time away from work could also help mothers continue to develop skills and experience, raising their earnings in the longer term. And the flexibility from subsidised additional hours would help mothers whose jobs don’t fit neatly into the current restrictions on when free entitlement hours can be taken.

Conclusion

The Labour party has proposed an ambitious new early years agenda that would fundamentally change the English government’s approach to childcare. Labour would replace the current system, targeted at working and disadvantaged families, with a more generous free entitlement available to all children aged two, three, and four. At the same time, they would dramatically increase the rates received by childcare providers, in the hopes that higher payments and more opportunities for training would improve the quality of the early years workforce.

This reform seems to be aimed primarily at benefiting children’s development; however, existing research cautions that the gains are likely to be modest, and the evidence on extending childcare for more hours and to younger ages is mixed at best. The long run effects of such a major change in policy on parents’ employment are also genuinely uncertain.

There are arguments in favour of universal benefits on this scale, many parents would no doubt welcome such a change, and the current complex patchwork of demand- and supply-side subsidies could certainly do with an overhaul. But the costs of this policy are both very large and uncertain. It is incumbent on those proposing this scale of policy change to do a better job of setting out who exactly they hopes to benefit, and how.

IFS Election 2017 analysis is being produced with funding from the Nuffield Foundation as part of its work to ensure public debate in the run-up to the general election is informed by independent and rigorous evidence. For more information, go to http://www.nuffieldfoundation.org.

Liberal Democrat proposals

The Liberal Democrats have also made major promises on extending the childcare system in England. Their manifesto sets out two goals for these promises: more generous childcare support will ‘help parents afford work’ and ‘impact on children’s attainment as they enter school.’

Like the Labour party, the Liberal Democrats are proposing a system that would eventually become much more generous to parents. In particular, the party is proposing:

  • 15 hours of free entitlement for all two-year-olds;
  • 15 hours of free childcare for children aged nine to 24 months in working families;
  • A long-term goal of 30 hours’ free childcare for two- to four-year-olds and for younger children in working families; and
  • An increase in the Early Years Pupil Premium to £1,000 per pupil per year.

There are obvious similarities between some of these policies and the proposals put forward by the Labour party to increase the availability of free childcare. However, the Liberal Democrats’ proposals don’t represent quite the overhaul that Labour is suggesting. They will start by extending part-time entitlements to new children, while Labour proposes both hours and coverage extensions at the same time. They have stopped short of promising a fully universal system, instead targeting additional care for the youngest children to those in working families and increasing the funding rate for places taken up by disadvantaged children. And it seems that the Liberal Democrats would keep the current system of subsidies through tax-free childcare, childcare vouchers, and tax credits.

As we have discussed in this observation, the extent to which these policies will improve children’s outcomes is unclear; certainly, the available evidence suggests it is unlikely that the changes they have proposed will have the ‘huge impact on children’s attainment’ that is promised in the manifesto unless the quality of care offered is very much improved.

While the Liberal Democrats rightly note the importance of high-quality provision, the measures they propose to increase the quality of provision are less comprehensive than those put forward by Labour. For example, the support they are offering through the Early Years Pupil Premium (EYPP) is less generous than the higher reimbursement rates that Labour seems to be proposing. The EYPP provides additional funding to disadvantaged three- and four-year-olds in early education, and is currently worth up to £300 per eligible child. Raising it to £1,000 per eligible child works out to £1.23 per hour in additional funding for disadvantaged children, a rise of about 25% over current average funding levels for three- and four-year-olds. This is about half as generous as Labour’s proposed 50% increase in the reimbursement rate, and would apply to fewer pupils.

The labour supply effects of the Liberal Democrats’ proposals are similarly uncertain. Research finding that only full-time care for the youngest child raised a mother’s chances of being in work (and even then by a relatively small 3.5 percentage points relative to the last term in part-time care) is not encouraging. However, as with the Labour party’s proposals, it is possible that extending free childcare to younger ages will reduce the amount of time that mothers spend out of work after the end of their maternity leave. Since longer absences from the labour market make it harder to find a new job, it’s possible that policies aimed at keeping mothers attached to the labour market might have larger benefits for labour supply than have been found at older ages.

As with the Labour party’s proposals, costing the Liberal Democrats’ proposals is challenging without making strong assumptions about take-up rates and future increases in funding. The party has allocated £5.5 billion for education and the early years spending in 2019-20, but this funding envelope includes other policy commitments such as extending universal free school meals to all primary pupils, protections for school and further education budgets, and support for professional development for teachers. Based on estimates of the cost of these other policies, it seems that the Liberal Democrats are expecting to spend just over £2 billion in 2019-20 on their commitments to extend the free entitlement and increase the Early Years Pupil premium. Of this, we would expect around £900 million to be spent on the extension of 15 free hours to all two-year-olds (assuming current funding rates, similar levels of take-up to what is seen among the 40% most disadvantaged two-year-olds who are already eligible for the offer, and not accounting for savings elsewhere in the childcare system)

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