Why free child care - not tax breaks - is the most impactful business measure in the budget
Though welcome, the most significant business intervention in Jeremy Hunt’s budget isn't ￡27bn in tax breaks, which much of the immediate commentary focussed on. It's free childcare.
?Here’s why:
This has a negative ripple effect throughout the economy: labour market inefficiency
So it’s encouraging that as part of a strong series of supply-side reforms
If we follow the evidence, this means fewer will drop out of the labour market due to expensive childcare. It also has a dynamic and enduring effect since the more years an individual spends out of the labour market, the lower the pay and productivity in future years. It will almost certainly more than pay for itself through the supply impact and increased taxes, making it a fiscal net plus as well.
The office of Budget Responsibility (OBR) judged that the policy “has by far the largest impact on potential output in this Budget". Together with changes to childcare provisions and conditionality in Universal Credit, the OBR says it will increase number of FTEs in the workforce by 85,000, at a time when we need those people the most.?
However, the OBR only considered the impact on a relatively narrow labour supply metric.?
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As Nobel Laureate James Heckman and others have shown, early years intervention can?improve life outcomes in ways that span decades, boosting social, economic and health outcomes; unlocking social mobility and breaking poverty cycles
Which is why when taking the generational view, few areas give such high return for every taxpayers' pound spent as investing in a child's early years.
And we're back to the benefits for business via the gains to productivity, diversity and efficient allocation of human capital.?
In addition to the wider societal gain.?
Of course, we also need to make sure that the early years sector is equipped and has the staff to provide all the necessary places - which will require some additional work in the UK.
But, together with the Chancellor's ambition to fund universal wrap-around care, it’s a great step forwards.
EY UKI Private Equity Tech Partner
1 年i absosolutely agree with you, Matt. In the rankings of availability, affordability and quality of the early childcare (there are a few), the UK scores really low. The UK ranked the 14th out of 31 countries per The 2020 Early Childhood Education and Care (ECEC) , the 24th out of 46 contries per The 2020 Global Childcare Index by the International Labour Organization, and the 17th out of 48 countries per OECD report. This is not acceptable. Even Spain, which has significant room for improvement, ranks higher than the UK in all the rankings mentioned before (6th place in the first example). This Government measure will help gender equality, gender pay gap, boost economy and reduce poverty. Bravo, finally a real initiative with a long term tangible impact. This is where I also think that businesses/ large enterprises should also contribute and play their role in society. Thank you for bringing attention to this topic.
EY EMEIA & UK&I Managing Partner – Government & Public Sector.
1 年Absolutely agree Mats - enough evidence in Europe that it works!
Transfer Pricing | International Corporate Tax
1 年Whilst I agree this is a step in the right direction it is far from a panacea. Government funding for these "free" places needs to be sufficient to ensure adequate staffing levels and that nurseries are not running at a loss. Increasing staff ratios for 2 year olds risks eroding quality of provision at the expense of widening access. Families will be faced with difficult choices around quantity vs quality of childcare. The other interesting question for higher earners is how the continuation of the high-income child benefit charge, pension changes and the earnings limit which restricts access to tax-free childcare savings will play out. There may be some high earners who choose to reduce their working hours and spend more time with family so they are not subject to exceptionally high marginal tax rates, or they may put more salary into pensions to be able to keep their child benefit or tax-free childcare. Both of these actions could mean the ultimate policy objective of increasing income tax may not be as successful as expected. Here's hoping that by 2025 these issues will have been figured out. In the meantime I will continue to spend 61% of my net income on childcare...
Taking a break from Fintech and figuring out what comes next
1 年Hear hear! 2 out 3 parents in the U.K. spend more on childcare than mortgage repayments, although this might have shifted given interest rate rises. Still…the bigger issue is that glorified childminding has taken the place of a proper early years education policy, and we are not equipping the next generation and the U.Ks supply side / labour force to win. At least not “for the majority”. I live in Germany and work for a Swedish company and the differences I see first hand compared to the U.K. are startling / frightening. Read developed versus developing economy startling. Hunts move is welcome although it’s more a policy ploy to deposition a key Labour policy, in the first instance, than something aimed at systemic change. It doesn’t mean we shouldn’t welcome it, but build on it and demand more.
Out of interest, do you have any data on the expected impact of the LTA change? I can't help thinking that wealthy older people exiting or partially-exiting the labour market is to do with lifestyle as much as it is to do with economics. Sure - there is a financial benefit of paying into pensions when you are at the point that your personal allowance gets eroded, but (anecdotally) older people are recognising that time is at least as important as money.