Fianna Fail has announced that it will bring in a new childcare tax credit f it gets elected. On that basis alone we can only hope they don’t get elected. And any other party that offers such a sop.
It seems that whenever there is a problem in our economy, some party or group of experts have a ready-made response: tax break. An under-performing enterprise sector? Tax break. A problem with housing? Tax break. Poor take-up of costly and uncertain private pensions? More and more tax breaks. It’s easy to understand. With tax breaks, policy-makers don’t even break out into a sweat. No detailed analysis, no innovative thinking, no attempt to build an infrastructure (which is truly hard work). Nope. Just close your eyes and throw the tax brteak at the economic dartboard. And if it misses? Throw another, throw more, convince yourself that you’re solving the problem.
Let’s cut to the chase: if tax credits are introduced it won’t do anything to make childcare affordable. It will probably increase the cost of childcare, thus wiping out some/most of the cash given to households through the taxation system. There is nothing to suggest it will increase quality of care. And it will have the least impact for the low-paid. Here are some of the arguments.
Childcare is costly - labour-dense and, thankfully, tightly regulated which can drive up costs. A model that is based on economic charging – which means revenue must at least equal expenditure – has to charge high fees. Deloitte’s Review of the Cost of a Full-Day Childcare Placement (which doesn’t seem to be on-line) estimated that the weekly cost per child is between €215 and €254 per week. And that was in 2007. Inflation index that up now and the costs will have increased. For a 45 week placement, the costs could reach €10,000 per year.
Let’s say a tax credit of €2,000 is provided. While that sounds high it would only mean a tax break of €400 (€2,000 at the 20 percent tax rate). This wouldn’t even pay for two weeks for a full-day childcare place.
If the tax credit was increased to €5,000 – a hefty amount – the cash amount would be €1,000. Again, sounds like a lot but would only amount to a few weeks cost. This could assist households that only use childcare part-time (e.g. after-school) but it is the households that need full-time childcare that face the greatest costs.
In short, the tax credit could be substantial but would still have little impact on households most in need.
Then there is inflation. Childcare providers are experiencing considerable cost pressures; most notably in the area of wages. Some are using JobBridge and the Community Employment Scheme to lower costs while others have been suppressing wages to near minimum wage level. Many community non-profit providers have experienced cuts in public grants and subsidies. There would probably be pressures related to delayed investment as well as providers would be trying to minimise costs during the recession and stagnation.
Which is why it would be understandable and economically rational (if not necessary) if providers increased their fees were households to receive a subsidy. In effect, the tax break would subsidise the provider, not the household.
We can see how this works when looking at the historical trajectory of childcare inflation. In the periods between 2000 and 2008, child income support increased dramatically (e.g. Child Benefit, Early Childcare Supplement). So did childcare costs.
- Between 2000 and 2006, overall inflation increased by 12 percent; childcare costs increased by 32 percent.
- Between 2006 and 2008, overall inflation increased by four percent; childcare costs increased by 11 percent.
Let’s assume that childcare costs increased by five percent over the two years after a credit was introduced. This would completely erode the benefit of a €2,000 credit and cut the €5,000 credit by half. Households would be running to standstill.
Finally, those most in need of affordable childcare wouldn’t benefit from a credit, not if it was based on the current model. The OECD and the EU have highlighted childcare costs as a barrier to labour market participation for lone parents; so did the Minister for Social Protection when she promised that ‘reforms’ of the lone parent allowance wouldn’t be introduced until we had a ‘Scandinavian’ model of childcare (sadly, the reforms were introduced, the new childcare model wasn’t).
A lone parent working full-time would have to earn more €12.20 per hour (or €24,750 per year) to obtain any benefit from a tax credit. That’s because they are exempt from income tax below that amount.
- If the tax credit was €2,000, the lone parent would have to earn over €13.20 per hour (or €26,750 per year) to receive the full benefit
- If the tax credit was €5,000, the lone parent would have to earn over €14.66 per hour (or €29,750 per year) to receive the full benefit
That’s the problem with tax credits. That’s why Government had to back off using tax credits to refund water bills – they don’t benefit low-paid or part-time workers. Of course, the Government could directly subsidise households, rather than using the tax system. This would be more effective but administratively more complex but it would have to be substantial and not induce additional inflation for it to have any impact.
‘Only through directly investing in services can the Government help to improve the quality of early care and education, at the same time as making it more affordable to parents . . . At present, the quality of early years services in Ireland is very variable. While there are many excellent services, there are also poor quality services. Any plan on ‘childcare’ needs to address both affordability and quality at the same time.
Tax breaks won’t do anything to improve the quality of early years services. And they won't even make childcare more affordable for families with the lowest incomes, who face the greatest challenge.’
At the end of the day, the problem is not the lack of household subsidy. The problem is the economic-charging model itself. How can other EU countries offer affordable childcare (costing €60 per week or less)? They use a public-service model, providing childcare through the public sector. This shares the cost of providing childcare throughout the economy – not imposing it on just those households who need it. This is the model we use for primary education and other public services.
A public service model can not only off childcare at below-market rates; it can provide higher wages, better working conditions, educational qualifications and scope for career advancement. In other words, it can create a professionalised sector.
I’ve written about the costs of this here. A public service model doesn’t mean the public sector alone has to deliver the childcare. A more sophisticated approach would be to create a network of childcare providers –non-profit, community-based, even private providers where appropriate - which would include direct public sector delivery where it is needed. In this network, fees, wages, investment (particularly, in education) would be tightly regulated. But the end result would be quality childcare at affordable fees.
This should be a key election issue, not only because high childcare costs are a barrier to participation in work and imposes such high costs on households; it is also a pivotal public sector issue. If progressives want to start convincing people that improving living standards requires investment and public service expansion, not tax cuts, then childcare is the issue that can do that.
We should let the children show us the way.