YESTERDAY saw the release of a report by the Child Poverty Action Group (CPAG) showing what many already expected. In recent years, child-related expenses have risen considerably, with the cost of childcare a major driver. Accumulated over 18 years, raising a child in a couple household now costs about £150,000.
This study is a valuable contribution to the debate, showing just how increases in the basic cost of living have eroded low income families’ living standards. Yes, the CPAG’s figures must be taken with a heavy pinch of salt: it identifies family “needs” through focus group discussions – a methodology which can produce a grossly inflated definition of needs, especially if the participants engage in a “bidding competition”. But the main finding can be endorsed without taking every figure at face value.
For a number of years, inflation has been highly asymmetric. Low income households have effectively faced much higher rates of inflation than headline figures would suggest. The prices of basic essentials, for which low income households have to reserve a higher proportion of their budgets, have been increasing at above-inflation rates. The CPAG is commendable for making this asymmetry visible.
But while it shows the impact of rising living costs on low earners, this research offers no indication of what might be causing the increase. This is important, however. The CPAG is concerned that benefit levels have not kept up with inflation-busting cost rises. And if inadequate benefit uprating is the only problem identified, the only conclusion allowed is that benefits have to be raised even further.
But that is not a cost-effective response, to put it mildly. The UK already spends more on family-related benefits than almost any other country in the world, surpassing even traditional high-spenders like Scandinavia, Germany, Austria and the Netherlands. The problem is not a lack of public spending. The problem is that, for items like childcare, the UK has become one of the most expensive places in the world.
Childcare is not inherently expensive, but it has become one of the most heavily regulated sectors of the UK economy. Operational details of provision are shaped by government regulation rather than business decisions. The cost of compliance, monitoring and inspection are ultimately born by service users. Minimum staff-per-child ratios, which reformers in the coalition tried (but failed) to relax, drive up labour costs further. And then there is the distorted industry structure: instead of allowing the existing sector to expand, the previous government built a parallel structure of provision – Sure Start centres – on top of it, replicating fixed costs. The coalition has left this legacy unchanged.
Childcare has to be returned to the market. Childcare providers should be liable for harm and damage, but how they run their business should be left to them. Restoring affordability through supply side reforms is a much more promising approach than pumping ever more resources into an unreformed sector.
Kristian Niemietz is senior research fellow at the Institute of Economic Affairs.