Coalition's childcare tax break is the wrong approach

David Cameron will unveil a new childcare tax break, intended to placate families suffering a stagnant economy and weak wage growth. The measure is intended to help 2.5m families with up to £1,200 per child at a cost of £1bn (doubling the budget and affecting five times as many parents). Britain's childcare costs are currently amongst the highest in the world.

A lack of affordable childcare can be a barrier to parents entering labour markets, reducing labour efficiency. A reduction in childcare costs could free up resources. The Institute of Economic Affairs' Kristian Niemietz notes in his book 'Redefining the Poverty Debate' that childcare is an area in which campaigners have increased costs through excessive regulation and have then pressured for transfers such as this one to offset those inflated costs.

The coalition should do the precise opposite. Childcare should be deregulated – but it is important to note that the alternative to statutory regulation is not ‘no regulation’. Rather, there is a conflicting relationship between statutory and private forms of regulation.
In markets where consumers demand quality signals about a product that they cannot easily judge for themselves, suppliers are enticed to look for signalling devices. In the case of childcare, it could fall on childminding agencies to devise standards that their members must meet, and rules they must follow.
The fact that a particular childcare provider belongs to such an agency would be an easy public demonstration of their quality.