John Healey has been urged to fix the £۱۰۰,۰۰۰ childcare “cliff edge”, that means some higher-paid employees cut back on work to avoid losing their entitlement.
Since the latest expansion of taxpayer-funded childcare in ۲۰۲۴, families with young children in which both parents earn less than £۱۰۰,۰۰۰ a year can be entitled to ۳۰ hours a week of care – or none at all, if one of them cross that threshold.
In a report, researchers from the Centre for Tax Reform (CenTax) said that, by the end of this parliament in ۲۰۳۰, the average parent crossing this “cliff edge”, will have to earn £۱۲۴,۰۰۰, to be no worse off after losing their free childcare.
Arun Advani, director of CenTax, said: “Our analysis shows the childcare cliff edge stands to grow dramatically by the end of this parliament, but there are solutions available to the government.”
The researchers find that “bunching” of incomes just below the threshold suggests that even in ۲۰۲۲ – the latest year for which data is available – about ۱,۰۰۰ families were artificially suppressing their earnings to avoid falling foul of the threshold. That could rise to almost ۱۲,۰۰۰ by the end of this parliament.
The thinktank, based at Warwick University, also suggested the policy may be incentivising some mothers to drop out of work. Below the £۱۰۰,۰۰۰ threshold, ۶% of lower-paid partners – usually the mother – are out of work; but above the threshold that rises to ۹%.
“The jump in non-working mothers at the point where their partner exceeds £۱۰۰,۰۰۰ income suggests the loss of childcare entitlement as a cause, with possible long-term consequences for those mothers’ earnings,” the report said.
CenTax also criticised the fact that the threshold is based on how much parents expect to earn in the year ahead – pointing out that some families appear to be claiming it, despite eventually earning more than £۱۰۰,۰۰۰.
It proposes several potential solutions. Restricting free childcare to ۱۵ hours to families above the £۱۰۰,۰۰۰ threshold, instead of withdrawing it altogether, would cost £۲۱۰m by ۲۰۳۰, it said.
Gradually tapering away the entitlement at ۲۸p for each £۱ earned above the threshold would be revenue neutral, but less problematic for parents, it adds.
Healey is set to deliver his first budget on ۲۸ October, against a backdrop of renewed fears about higher inflation and febrile global bond markets.
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Analysts believe higher than expected interest rates on the Treasury’s debt are likely to have wiped out at least half of the £۲۴bn headroom that Healey’s predecessor Rachel Reeves built up against the government’s fiscal rules.
In his first major speech in Coventry on Monday, Healey promised to put growth at the heart of his approach; but also warned that Labour must “be honest” about the constraints on public spending in the years ahead.
Since taking over as Labour leader in July, Andy Burnham has announced a VAT cut on electricity bills and capped bus fares; but Healey has also suggested the government is keen to do more to give hard-pressed consumers a “breathing space”.
