The Universal Credit is a good idea and there is widespread political support for the principles that inform its design. But rolling childcare support for nearly half a million families into it is highly problematic. In particular, it will mean that childcare support for lower earners is subject to a savings means-test, so that families with over £16,000 set aside will no longer qualify for help. This is becoming a big issue in the Parliamentary debates on the welfare reform legislation.
A far better reform would be to integrate support for childcare - both the tax credit element and childcare vouchers - into a single, sliding scale system. Currently, the bulk of tax credit support goes to low earners while better-off basic and higher rate taxpayers benefit the most from vouchers. The current system has a U-bend shape of generosity to bottom and top earners, rather than a downward sloping gradient of support that tapers away as families get better off. Ideally, childcare funding should be universal to all families, so that everyone has a stake in the system, but with more help for those who need it. The danger with taking childcare funding into the Universal Credit is that it won't be universal at all: poorer families without savings will benefit, but many in the so-called 'squeezed middle' will lose out.
The Universal Credit may bring greater certainty and clarity of support to people moving off welfare into work, however. Paying childcare costs through the tax credit system suffered from complexity in both design and application, which meant it was under-utilised among its target groups in places like London, where childcare costs are high. Compare that to the 90 to 100 per cent take-up rates for free nursery places and you have a simple lesson: when parents know places are free, they will make use of them.
When we eventually emerge from the dark tunnel of deficit reduction, this is the debate we need to have as a country. Can we design a system of childcare and early learning that benefits all families, and is simple to use and affordable to all? Get this right and you put the welfare state on firm foundations for the future.
