Table of contents
1. Childcare: Why are costs so high?
The UK has some of the highest childcare costs in the developed world. Data from the Organisation for Economic Cooperation and Development (OECD) showed that in 2021 childcare costs for a couple in the UK with two children were 26% of their household income. Figure 1 shows that on this measure the UK had the highest childcare costs compared to other OECD countries.
Figure 1: Net childcare costs as a % of household income, 2021 or latest available
(OECD, ‘Net childcare costs’, accessed 11 July 2022. Data is for a couple on 67% of the average wage)
The costs of childcare in the UK have risen significantly in recent years. Analysis from the Trades Union Congress found that childcare costs for parents with children under two had risen by 44% since 2010, with fees averaging £7,212 a year in 2021. Commentators have mentioned government underfunding, tight regulation, and staff shortages as contributing factors to the rise in costs. More recently, the impact of the Covid-19 pandemic has closed some nurseries. The Early Years Alliance, a membership organisation of childcare providers, has said there is a “crisis” of staff recruitment and retention in the sector.
The UK has a predominantly privatised, market-based system of childcare provision. However, the government provides a range of tax credits and subsidies to help families with childcare costs. Childcare in England is free for two-year-olds if their parents receive certain welfare benefits. All three to four-year-olds are entitled to 15 hours of free childcare, and many three to four-year-olds can receive 30 hours of free childcare, if their parents are in work and each earns less than £100,000 a year.
The government also regulates standards in the childcare sector, for example through setting child to staff ratios. The current minimum child ratios in England are:
- for children under two, one member of staff for every three children
- for two-year-olds, one member of staff for every four children
- for children three and over, one member of staff for every 8 or 13 children (depending on the qualification level of the staff)
In an Institute for Fiscal Studies (IFS) podcast on the childcare system, the chief executive of the Early Years Alliance, Neil Leitch, gave his view on the main reason for high costs in the sector. He blamed “chronic underfunding” in the sector compared to the OECD average. In the UK, this produced the “lowest investment and yet some of the highest childcare costs”. He said that, following a freedom of information request, the Department for Education (DfE) had released estimates which showed that adequately funding the free hours entitlement would “cost an additional £2 billion”. He said that the DfE had estimated that the hourly rate it would need to pay providers for the free hours in 2021 would be £7.49, but “what the sector was paid in the very same year was £4.89”. He claimed that the government therefore “knowingly appreciates that underinvestment will be reflected in higher costs to parents”.
2. Government consultation on child ratios
On 4 July 2022, the government launched a consultation on increasing the staff to child ratios for two-year-olds from 1:4 to 1:5 in England. The government said the reform could help with the cost of living, by potentially reducing the cost of childcare “by 15%, or up to £40 a week”, if providers made the changes and passed on all the savings to parents.
Some commentators have supported the proposals. The free market blog CapX has said that relaxing child ratios is a sensible supply-side reform that could reduce costs. However, some in the childcare sector have criticised the proposals and raised concerns that they could compromise safety and quality of childcare services. The National Day Nurseries Association has said the reform “won’t make any meaningful difference” to the cost of childcare for providers or parents. It said this could only be achieved by the government “paying the full rate for funded childcare places”. The union Unison, which represents some childcare staff, said “children will be put at risk and staff will be driven out” of the sector. The union said the government should instead increase funding to the sector to improve the pay and status of the workforce.
3. What is childcare for?
In the IFS podcast on childcare, Neil Leitch said there was “confusion about the purpose” of early years childcare provision. He said that when childcare is discussed the focus is often on “just that, care”. He said that too much policy, including government policy, had been focused on seeing childcare merely as a means to get parents, and particularly women, back into employment.
He said there should be a far greater focus on education and child development, particularly for the most deprived and vulnerable children. He said that childcare workers should be seen as educators, with the accompanying levels of pay and social respect.
Also speaking on the podcast, Christine Farquharson, senior economist at the IFS, agreed with Mr Leitch. She said that there was an inconsistency in the government’s free hours policy. She said it gave free hours to parents who are in work and on higher incomes, whereas it is the most disadvantaged children who could benefit from the educational and social aspects of childcare irrespective of whether their parents are working.