Good morning from New Economy Brief.
The government has promised to extend childcare provision to eligible children under three, with the roll-out beginning this week. But how will these additional hours actually be delivered? Is this a “pledge without a plan”?
This week’s New Economy Brief explores what is at the heart of the childcare row, and how childcare fits into the bigger economic policy picture.
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A paper promise?
Back in March 2023, the government promised parents that they would oversee a large expansion of free childcare, providing additional free hours for children not covered by the existing 30 free hours policy (which only covers eligible 3 and 4 year olds). Phase one of the expansion started on Monday with additional free hours for eligible 2 year olds. But, while there is a general consensus that additional childcare support is needed, the expansion has triggered a huge row about whether, under current plans, it can actually be realised in practice. Labour have accused the government of having “a pledge without a plan” and campaigners have warned that many will miss out. What’s going on?
A sector in crisis? The backdrop to the roll-out is a childcare sector which is incredibly stretched. As we set out previously, there are huge issues with workforce recruitment and retention, many smaller nurseries have closed or are closing, and the cost of childcare for parents is eye-wateringly high. It is worth noting that women make up the majority of the childcare workforce, and that endemic low pay in the sector entrenches gender pay divides.
'Free' hours. In this context, you’d be forgiven for thinking that providing more free hours would be unambiguously good. But the issue, as the Women’s Budget Group points out, is that the government funding for those ‘free’ hours simply isn’t sufficient to cover the costs of provision. This forces providers to cross-subsidise those hours from other parents. The new entitlements are expected to lead to a surge in demand that providers are unable to service. While larger providers (often owned by large investment funds) are able todo this and absorb the costs, smaller ones often can’t or have already closed. Research from the Early Education and Childcare Coalition estimates that close to 50,000 new staff could be needed this year and again next year, and that only 17% of nursery managers planned to expand the number of places they offer. The result is that many parents will end up with government-issued codes that entitle them to free childcare, but no local nursery with available places.
A market mess. In a new report, JRF’s Abby Jitendra argues that the whole subsidies issue simply masks a childcare market that isn’t working. She argues that lax regulation has led to a market characterised by gaps in provision, variable quality, profiteering, and where local authorities lack information to properly manage local childcare markets. JRF recommends a new ‘social licensing model’ where increased public funding is conditional on meeting higher standards of provision.
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Childcare and the economy.
Childcare is obviously hugely important for families, but there is also a much bigger economic context to this debate which is worth unpacking. Along with healthcare and education, social care and childcare can be regarded as part of the social infrastructure which sustains an advanced economy. Often overlooked by mainstream economics and policymakers, spending on social infrastructure tends to generate higher employment than investment in physical infrastructure. A prime example of this is investment in childcare to enable more unpaid carers - predominantly women - to return to work.
Missing potential. According to the Centre for Progressive Policy, the UK economy is missing out on £27bn a year in economic output due to childcare being inaccessible and unaffordable. Unpaid care is overwhelmingly undertaken by women, which leads to a reduced workforce, lower employment and economic activity, a smaller tax base and skills shortages. 1.5 million mothers would increase their working hours if they had access to suitable childcare, generating between £27bn and £38bn in gross value added (GVA) every year, nearly 1% of UK GDP.
Paying for itself? The Women’s Budget Group calculates that to provide 30 hours of free childcare for all children aged 6 months to 4.5 years, would require additional spending of £10.4bn a year and create approximately 310,000 new jobs. It would increase revenue from income tax, indirect taxes and reduced spending on social security which would make the additional spending requirement fall from £10.4bn to £3bn. This means that about 70% of the gross annual spending would be recouped simply from increased employment and tax revenue.
Mind the gaps. Insufficient childcare also underpins the gender pay and employment gaps which continue to hold back the UK economy. If women had the same level of participation in the labour market as men, the average local economy would generate, and additional £1.68bn of GVA per year, equivalent to £88.7bn for Wales, Scotland and England, nearly the same as the contribution of the financial sector in the UK. Completely closing gender employment gaps between all local authorities would increase the UK’s economic output by £23bn (1% of GDP).
Minimum wage. The Low Pay Commission’s latest report has found no compelling evidence that minimum wage increases have reduced employment. They recommended increasing minimum wage rates for young workers, more action on insecure work, and access to data on wages and hours directly from employers.
Fiscal rules and falling national investment. Former Bank of England Chief Economist Andy Haldane appeared on ITV’s Peston explaining that Jeremy Hunt & Rachel Reeves’ fiscal rules are holding back investment and growth, describing them as "self-defeating on their own terms".
Investment in social infrastructure. The Guardian’s editorial team have published a helpful explanation of the case for broadening the Treasury’s accounting rules whereby greater weight is placed on social as opposed to physical infrastructure. They suggest that Labour’s new fiscal rule to enable more borrowing to invest might end up prioritising the physical assets over people and their jobs despite “ambitious investments” being “desperately needed” for the functioning of public services.
Rent controls in Scotland. The Scottish Government has introduced legislation proposing a new system of rent controls. Future Economy Scotland’s Laurie Macfarlane has produced a helpful Twitter/X thread explaining the economic case for rent controls; essentially, housing markets are imperfectly competitive as “landlords exercise monopoly power over a spatially fixed location” and “information is highly asymmetric and imperfect”.
What caused pandemic-era inflation? Prominent economists Olivier Blanchard and Ben Bernake have published a paper looking at the causes of inflation in the US after the pandemic, finding that: “contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge resulted from shocks to prices given wages.”
Decarbonising the energy system by 2050 could save trillions. A new study from the University of Oxford’s Smith School of Enterprise and Environment, the Institute for New Economic Thinking at the Oxford Martin School and others has found that a fast transition to a decarbonised energy system is cheaper than a slower or no transition at all. Essentially, previous models over the last 20 years have “badly overestimated the future costs of key clean energy technologies versus reality”, so that “scaling-up key green technologies will continue to drive their costs down, and the faster we go, the more we will save”.
Community-owned nightclubs. DJ Gilles Petersen has published an article in the Guardian on the economics of collapsing British nightlife. He suggests that looking at the German model of community owned football (the ‘50+1’ rule that ensures club members have a majority ownership stake) could provide an economic blueprint for saving local music venues and preserving a more diverse and experimental cultural environment.
