Childcare in the UK is notoriously expensive. Recent research shows that a household needs to earn at least £88,000 in order to afford childcare costs for two pre-school aged children if they’re paying a mortgage and maintaining a minimum standard of living.
Despite reforms made last year, childcare is still unaffordable for many families and prevents parents – often women – from having the option to return to work. Experts argue that public spending on childcare provision should be seen as investment, and that the labour market and productivity gains would far outweigh the initial cost. This week, we explore the economic case for childcare investment and the arguments for counting it as capital rather than current spending.
The cost of childcare has climbed significantly over recent years. The cost of 25 hours of childcare provision in a nursery for a child under two rose by 59% from 2010 to 2021 – twice as quickly as overall inflation over the same period. According to campaign group Pregnant Then Screwed, 84% of parents say that childcare costs cause financial anxiety. Meanwhile, 17% have had to leave their jobs due to the cost and 62% have been forced to work fewer hours. Many parents have also cited the impact of childcare on the cost of living as a key reason for not having more children. The OECD finds that for a UK couple on an average salary, net childcare costs account for a quarter of average household income.
Recent reforms. Changes in recent years have focused on reducing costs for parents. In March 2023, the then Conservative government promised 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 in April 2024 with additional free hours for eligible 2 year olds. In September 2024, this was expanded to eligible nine month olds. But experts such as the Early Education and Childcare Coalition (EECC) have argued that funding has not matched the promise of extra provision.
What now? The Labour government has promised to continue rolling out ‘free’ childcare hours and sees childcare as a key part of its mission to break down barriers to opportunity. However, as the Institute for Public Policy Research (IPPR) argues, expansion “comes on top of a system which arguably has been creaking for some time,” suggesting that the government should instead take this opportunity to rethink the state’s role in childcare provision and move towards a universal guarantee. The Fawcett Society has also called for ‘universal hours’ from the end of maternity leave to school age.
Beyond costs. Likewise, the Joseph Rowntree Foundation (JRF) has argued that while “tackling high costs and delivering a funding settlement to providers that actually meets the cost of caring are essential … this alone won’t solve the problem.” JRF suggests that what’s needed is greater scrutiny on the structure and functioning of the childcare market overall, and a focus on issues like “poor oversight, variation in quality, gaps in sufficiency for people in need of support, and private-for-profit providers operating without transparency and along attractive business models”, as well as costs.
Of course, properly delivering free childcare hours (without reducing the quality of services) requires money. The Women’s Budget Group (WBG) calculated that the government needed to spend an extra £5 billion per year to cover the expansion of free provision announced last year, let alone to provide anything extra. WBG estimates that high quality, free universal childcare would cost £25.8 billion per year. This would cover 35 hours of free childcare a week and higher wages for staff. This sounds like a lot of money in today’s fiscal context, and it is. But experts argue that we need to change the way we look at childcare spending, and instead see it as an investment that will at least partly pay for itself due to its positive impacts on the economy. WBG argues that childcare should be funded by borrowing, like infrastructure investment. Repayments could be spread over multiple years, “with the debt repaid by the revenue created by the investment.” So how would the government see a return on childcare investment?
Missing potential. Investment in more extensive free childcare provision would be substantial, but so too is the loss to the economy due to the current system. According to the Centre for Progressive Policy, the UK economy is missing out on £27 to £38 billion a year (approximately 1% of GDP) in economic output due to parents (usually women) having to stop working in order to provide childcare. The same research found that around 1.5 million mums would work more hours if they had access to affordable, suitable childcare.
Exchequer effects. Meanwhile IPPR and Save the Children calculate that increased childcare provision could raise approximately £8 billion per annum for the Exchequer, partly through increased income tax receipts as a result of parents returning to work. This figure also includes a reduction in social security spending of £2.8 billion and additional VAT of £1.5 billion due to parents’ increased disposable income.
Years of underinvestment, low pay and high costs: childcare is facing many of the same challenges as other sectors across the UK. While next month’s spending review will see tough competition for public spending and investment, the approach of rolling out free hours clearly cannot continue forever without additional investment. And it is clear that investing in childcare not only improves the lives of individual families, it has a significant positive impact on the wider economy and on society as a whole - both now and for future generations.
Politics of the two-child limit. The Guardian reports on various splits between Cabinet members and staffers such as the Prime Minister’s Chief of Staff Morgan McSweeney over the relative political vs fiscal costs of reforming the two-child benefit cap. The Government has delayed the Child Poverty Strategy until after the Autumn Budget (originally expected in June), which Gordon Brown argues offers the government the opportunity to consider a levy on gambling or banking to fund its abolition. IPPR’s Harry Quilter-Pinner explains how the government could tax online gambling more fairly and redirect the funds into tackling child poverty.
Share the Wealth, a new organisation campaigning against wealth inequality and corporate profiteering, has used the Sunday Times Rich List to calculate that a 2% wealth tax on only the richest 3 families would raise enough to reverse cuts to the Winter Fuel Payment. Extending the tax to the top 20 families would raise enough to reverse cuts to both the Winter Fuel Payment and Personal Independence Payments (PIP). Extending it to the top 50 would be enough to reverse cuts to the Winter Fuel Payment and PIP, and scrap the two-child limit.
Climate costs of data centres and AI. Opportunity Green’s new policy briefing explains how soaring demand for data centres threatens to overwhelm energy systems and climate goals. They argue that stronger regulation is needed to limit emissions and resource use from AI systems.
Financing green technology. The New Economics Foundation’s Jaya Sood has written a blog Green Alliance’s explaining why mature technologies shouldn’t miss out on support from the National Wealth Fund (NWF). She proposes that the NWF should “behave more like the European Investment Bank, which funds both early and late stage technologies, than a policy bank that simply derisks nascent ones.”
Economics after neoliberalism. IPPR has published a new report proposing a "new set of defining and guiding ideas” to counter the rise of the populist radical right. Authors Parth Patel, Jane Gingrich, Will Davies and Nick Garland focus on “three big challenges that progressives need to meet and master”: “national borders have been reasserted over global integration”; “politics and the public sphere have fragmented and polarised”; and “faith in free markets as the best way of organising economies has declined”.
