Flowchart: Free early education, Working Tax Credits/Childcare element, Employer Supported Childcare or Tax Free Childcare?

In my capacity as number-cruncher for the Citizen's Income Trust, I have spent this weekend trying to get the bottom of all the overlapping schemes which various government bodies administer. To simplify things in my mind I had to create a flowchart.

The joke is that whichever route you take and whichever of the three boxes at the bottom you land in, you end with with benefits/discounts worth about £90/week for every child aged 2 to 4 at a registered nursery or child minder. Only instead of bumping up the Free Early Education to £90/week and calling it a day, they split it up into smaller amounts, all with their own conditions attached.

Why do they make it so complicated? Don't answer that.

"Call to align nursery and primary school teacher status"

From the BBC:

Nursery school teachers should be given the same status and pay as those in primary school, the Pre-School Learning Alliance has said.

It said early-years teachers were being "locked out" of teaching in primary schools, even in reception classes.

Nursery teachers were very disheartened at the government's failure to bring the two sets of teachers' status in line, said the charity.

But the government pointed out that early-years teachers were probably just a bit irritable because of the heat wave.

"Maybe it's time for their glass of milk and afternoon nap," added the spokesman for the DfE. "We'll do some finger painting later on, that usually cheers them up."

At last, a sensible article on child care costs

From yesterday's City AM Forum:

IT MAY sound incredible given the current political debate, but the UK government now spends more as a percentage of GDP on childcare than all European countries except Denmark. Yet the direct costs to parents continue to rise inexorably...

Quality concerns (1) have led to excessive regulation. On top of the staffing ratios (among the tightest in the world), demanding health and safety conditions, local authority and Criminal Records Bureau checks, we also have the unnecessary and expensive Early Years Foundation Stage. All “early years providers”, whether large nurseries run by businesses, state primary schools or childminders in their own homes, have to follow a structure of learning, development and care for children from birth to five years old, monitored and overseen by Ofsted.(1)

I haven't done any Marshall curves for ages, so here goes. See if you can sketch an alternative third chart where the staff ratios remain unchanged, so costs are still £100 pcpw - but this time, the government gives parents a £50 pcpw 'nursery voucher'. What happens to quantity and price paid?
1) What "quality concerns", pray tell? If you're not happy with your children's nursery, then you take them elsewhere. Effectively, each nursery is inspected twice a day by each parent at drop-off and pick-up times (which are different for different children). So nurseries are more or less under constant outside supervision by people who are paying through the nose and really care. Sunlight is the best disinfectant etc. In a society riddled with scandals and horror stories, when was the last time you read one about a children's nursery?

You read about nastiness in NHS hospitals because that's a take-it-or-leave-it-thing, you can't decide half way through a hospital stay that you'd rather be treated elsewhere. And you read about nastiness in care homes because there is little outside scrutiny, they'd be much better if close relatives visited every day.

2) He only mentions a fraction of the bureaucratic crap you have to go through to open a nursery. I won't bore you with my own experience of ten years ago again, but as it happens I was chatting to somebody recently whose wife works for a nursery and whose mother (or mother in law?) owns and runs a nursery elsewhere and it is quite simply true - the barriers to entry are enormous, once you are up and running it's more or less a licence to print money, but nursery workers are not very well paid and they don't have the option of setting up on their own.

The actual annual cost of complying with these regulations is not huge and doesn't really add to the cost base; the reason they push up prices is because supply is restricted to much less than the market clearing level. You can tinker with the staffing ratios all you like, that will hardly affect the price paid, it will just push up unearned profits (i.e. "rents").

"Childminder Eliza Bethtruss attacks unruly politicians"

Spotted by BobE in The Guardian:

Childminder Eliza Bethtruss has criticised "chaotic" proceedings in the Houses of Parliament for failing to prepare MPs for a life after politics. The nursery assistant said she had "seen too many chaotic settings, where MPs are running around the corridors".

She said that by allowing unruly behaviour in Westminster, MPs are unable to sit still. She said: "We want politicians to learn to listen to their voters, learn to respect an manifesto pledge and work regular hours, so that they are ready for life in the productive sector. This isn't about middle-aged white men trying to run the country properly – it's unstructured play which doesn't teach our elected representatives to be polite and considerate through activities which benefit the electorate."

In comments to the Daily Mail, Bethtruss – who has two children – called for a more traditional approach similar to the French system, where actual voters supervise newly elected MPs.

"What you notice in the French parliament is just how calm they are. All of their debates are structured and led by somebody who knows what he is talking about. It's a requirement. MPs get into the habit of waiting their turn, of saying hello to the Speaker when they come into the debating chamber," she said. "They learn to socialise with each other, pay attention to the wishes of the public and develop good manners, which is not the case at Prime Minister's Questions. Who'd want to employ people who behave like that when they are supposed to be working?"

Bethtruss came under criticism on Twitter for her comments, which the Daily Mail précised as: "In an interview with the Daily Mail, she said sttings in Parliament were filled with self-interested meddlers 'running around with no sense of purpose'." Anand Shukla, chairman of the Labour backbench committee, tweeted: "Just what sense of purpose does she expect politicians to have?"

[Quangocracy] Please sir, may we have some more?

Nursery places in the UK are, as we know, very expensive and are getting more expensive all the time, even though the prices quoted in The Daily Mail don't seem to be significantly higher than what we were paying for our lass when she finished nursery five years ago. It seems fair to assume that these high costs are because of the enormous barriers to entry, separate topic.

And as we know, but as is commonly airbrushed out of the picture, the Tories introduced a great nursery voucher scheme back in the 1990s, which is officially described as 15 hours a week free childcare but by and large, what parents do is fill in a form which the (private) nursery gives them, and the local council then pays the nursery directly for the cost of the first 15 hours of fees, I remember this working out at about £70 a week, I don't know how much it is now (perhaps it varies from council to council?).

These vouchers are non-means tested and administratively no hassle whatsoever, you get the monthly or quarterly bill from the nursery and then they just knock off the value of the vouchers, which gets the cost down to something affordable and/or reduces the break even point where it's worthwhile for Mum to go back to work.

To completely muddy the waters, there are also the Childcare Tax Credits, which are heinously complicated and by and large self-defeating because the upper limit on qualifying costs is artificially low, they are reduced by the vouchers you get and are means-tested, so once you've done the numbers, you end up with £10 or £20 a week at an adminstrative cost of about £10 or £20 a week.

But let us reserve today's ire for the third kind of subsidy. Take it away, rent-seekers:

One of the ways in which the Government helps parents with childcare costs is a voucher scheme which is available through employers and allows mothers and fathers to pay for childcare out of their pre-tax wages. Basic rate tax payers can pay for up to £243 of childcare a month with the vouchers.

Julian Foster, managing director of one of the voucher schemes, named Computershare Voucher Services, called for the limits on childcare vouchers to be increased and said the scheme should be extended to help the self-employed. He said: "(This) would show to this country's working families that Government "gets it". They get that support needs to be widely accessible, they get that household budgets are becoming increasingly strained, and they get that working mothers and fathers - part of the lifeblood of the British economy - need adequate support to raise their families and this country's future."

You do NOT magically get £243 a month in vouchers, it is a salary sacrifice thing, so you are only saving the PAYE on that £243 (which is restricted for higher rate taxpayers according to some tortuous formula), i.e. about £100 a month, taking employee and employer together. And a whole private bureacracy has been built up around these, businesses which actually issue bits of approved paper to employers who enclose them with their employees' pay packets, and then the employee has to remember to keep them somewhere safe until the next bill from the nursery arrives (I'm bloody sure I found some unused ones after the lass had started school, then the nursery accepts the vouchers, recalculates the bill and takes the paper vouchers and sends them back to the scheme adminstrator for the actual cash payment etc etc etc.

What sort of mark-up do these private bureacrats make per voucher? It must be a couple of quid, money which is completely wasted, as are the Childcare Tax Credits and associated administration costs (and grief for parents).

Why not just scrap the employer vouchers and the Childcare Tax Credits and increase the number of "free" hours qualifying for the vouchers to 20 or 25 or something? That way we only have one layer of bureaucracy, being the simplest and easiest one which has stood the test of time and actually gets nursery bills down? And which illustrate that education vouchers are just as do-able, if not more so.

Fakecharity hopes that nobody spots the irony...

From The BBC:

Some parents could be forced out of work and into poverty as the rising cost of childcare outstrips wage rises, says a report.

A survey by the Daycare Trust charity showed that the average cost of nursery care in Britain for children under two rose by nearly 6% last year. Average wages rose by just 0.3%. The government said it was investing an extra £300m to help families with childcare costs and increasing places in free early years education...

Their whole logic is flawed; if a woman can earn £15,000 net and spends £10,000 net on childcare, it's just about worth going to work for incremental extra income of £5,000 against staying at home; if the cost of childcare increases by a couple of thousand, then it might no longer be worthwhile going to work, but there is no cut-off point at which women are 'forced into poverty'; every £1 increase in childcare costs is, at worst, a £1 fall in net income of the parents, it doesn't suddenly tip over from happily working to abject poverty.

But glossing over that, who is The Daycare Trust? By and large, it is a pressure group acting on behalf of its members - being the self-same nursery providers who are 'forcing people into poverty' by hiking their prices. A normal person would say "Well stop hiking your prices then!" but nope:

The Trust wants the government to boost the value of childcare tax credits to the poorest families and to commit itself to free nursery education to all two, three and four-year-olds by 2015.

The BBC use their official fakecharity template for this article; the giveaway is that the article ends with a government minister agreeing that 'something must be done', in other words the whole thing was co-ordinated between them beforehand.

And, just for completeness, who funds The Daycare Trust? Their members, perchance..? Page 10 of their 2011 accounts tell us that they get £1,003,000 a year (over eighty per cent of their total income) for "Policy, research and other projects", "Consultancy" and "Advice and information".

Pages 15 and 16 provide a bit more detail on who their paying customers are: nearly all of that £1,003,000 is from The Department of Education, London Councils, The Big Lottery etc.

"High childcare costs forcing poor families to turn down work"

From The Metro:

Parents spend almost a third of their incomes on childcare – more than anywhere else in the world, say the Save the Children and Daycare Trust charities... Fiona Weir, of the charity Gingerbread, said government plans for childcare are a ‘ticking time-bomb for welfare reform’...

Ho hum.

Save the Children, total income £203 million, of which half was from various governments, primarily UK government, the EU, the US government and the United Nations (2009 accounts).

Daycare Trust, total income £1,115,450. They received £349,352 from the Dept of for Education; £120,000 from London Councils and £16,907 from the Equality and Human Rights Commission for "Policy, research and other projects" (2010 accounts).

Gingerbread, total income £3,125,643, of which £1,576,203 was payments from DWP for "back to work" type stuff (including income for training people to run "back to work" schemes) and £891,361 was grants (almost certainly from the government) (2010 accounts).
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As to the substantive issue, they are all missing a right old trick here. From the point of view of an individual, it is only worth working if

[wages minus income tax/benefit withdrawal] > [costs of travel, childcare minus subsidies].

So hiking the subsidy is much the same as reducing income tax on lower earners.

Further, from the point of view of society as a whole or the taxpayer in particular, the calculation is different. Is it better, for example, for three mothers to stay at home with their young children (not paying a penny in income tax) or for one of them to work in a nursery looking after all of the kids and the other two mothers to go out to work?

Assuming the latter (which is up to personal choice, of course), then up to a certain level of subsidy for childcare, there is no net cost to the taxpayer, as long as the income tax etc. paid/generated by the three working women is equal to or greater than the amount of the subsidy, it's just a sort of clumsy tax refund.

I'm not sure what that optimum level of subsidy (or personal allowance) is, but it's almost certainly higher than what it is presently.

EU talks sense - shock.

From the BBC:

The European Commission has set out individual recommendations for the economies of each of the EU's 27 member states and the eurozone as a whole...

The report encouraged the UK government to make sure there was "no slippage from the ambitious spending reduction targets". The UK was also was told to reform its housing market, planning system and mortgage market, as well as to tackle youth unemployment and skills shortages.

The report also called on the UK to increase the supply of childcare and improve the availability of financing to small and medium businesses. It warned that "the UK appears to be at high risk with regard to the long-term sustainability of public finances". It pointed, in particular, to the cost of an ageing population to the public finances.

Dill and OnTheOtherHand over at HPC did a bit more digging and uncovered these gems:

(10) The UK experienced a house price boom in the decade before the crisis. Prices fell sharply after the crisis hit but have since recovered partially and remain at historically high levels. Transaction levels collapsed and have remained very low. The house price boom contributed to the large increases in household indebtedness and unsustainable growth in household consumption in the pre-crisis decade. The collapse in housing transactions drove corresponding falls in receipts on housing transaction taxes, contributing to the worsening of the UK fiscal position.

Weaknesses in the housing market also help explain the UK's high expenditure on housing benefits and high share of the population in state-subsidised housing. The UK has announced initial reforms to its planning system and to mortgage regulation. Reflecting the importance of this challenge to all sectors of the UK economy, there is a case to build on these measures to develop a more comprehensive package of reforms including in the mortgage market and property taxation to address these issues. (link)

and...

A single annual property tax based on current values could avoid many of the problems of the current regime. The regressivity of Council tax and perverse incentives of SDLT could be eliminated. A higher tax burden on more expensive properties would discourage speculative investment and hoarding, reducing pressure on housing supply and helping to discourage bubbles.

Revenue from such an annually recurring value-based tax would be more stable than SDLT since prices are much less volatile than transaction volumes. A value-based tax could also help weaken the link between house price inflation and consumption since post-tax income would be supported by lower taxes during times of falling house prices and held back when house price inflation was high. (link)

I imagine that this would go down a storm with the Daily MailExpressGraph, if they could be bothered to actually read it: "EU plans tax raid on UK homes!" or something like that.

The Tories happen to be right on some issues*

Issue 1:

Gordon Brown has attacked the Tories over reports they plan to introduce "top-up fees" for nurseries in England. The prime minister said to demand more money from parents at the same time as raising the inheritance tax threshold for the rich was "simply not fair".

The Conservatives accused Mr Brown of hypocrisy, saying nurseries were closing due to Labour underfunding the weekly entitlement to free childcare. Representatives of non-state sector nurseries have backed the Conservatives' argument and say many will go out of business if current funding arrangements continue.

Indeed. It was the Tories who introduced nursery vouchers in the early 1990s and the system worked a treat (on a day to day level). But there are now bizarre rules which prevent nurseries from charging 'top up fees' (most do it, but they have to rejig their invoices so that it is not immediately obvious). If the government goes round taking a closer look, then a lot of them would be in trouble. Nursery vouchers are half-way to education vouchers - they just 'work', parents understand them and parents are happy to pay the difference - or happier paying the difference than doing without a nursery at all - sorted.

And I doubt whether nursery vouchers represent any great cost to the taxpayer either, remembering that they only cover about half the cost of nursery places - they allow mothers to go back to work, so the mother is paying income tax; the people working at the nursery are paying income tax; the nursery is paying more income or corporation tax on its profits. I'd guess that all those extra income taxes added together is roughly equally to the face value of the vouchers (it might well be more).

Issue 2:

Conservative plans to allow parents and charities to set up their own schools have been called into question by two senior Tory council figures. Paul Carter, leader of Kent County Council, said funding parents to start their own "free schools" would threaten the budgets of other local schools...

"Secondary schools [cost] around £4,000 plus per pupil. If 10%, 12%, 15% of that would be taken away from maintained schools and given to free schools and academies - local authorities still have statutory functions to perform. They have to arrange and organise school admissions, statements for special educational needs pupils - a whole range or services that need paying for. That can't be taken away from us and given to free schools or academies because they don't have the statutory duty to carry out these responsibilities."

For sure, Mr Carter. But it can't be rocket science to work out the marginal cost of a 'normal' pupil and just pay that over to a "free school", thus leaving some extra money with the council to deal for extra stuff. The Tories weren't suggesting using the police budget or the old age care budget to fund "free schools" either. Pointing out that local councils have to 'arrange and organise school admissions' is really scraping the barrel - firstly you won't have to worry about admissions to "free schools" and secondly this can't be such a huge item, a few hundred quid per pupil twice a lifetime?

I'm also surprised he admits that the cost per pupil is as low as £4,000, that gives us a good idea as to what level to pitch schools vouchers in future.

* I hasten to add that UKIP's policies are even simpler and better than what the Tories propose.

Fakecharity, blogger celebrate annual ritual

From BBC:

Childcare costs in England, Wales and Scotland are continuing to rise, a survey by the Daycare Trust suggests. The trust found parents in England paid an average of £4,576 a year for 25 hours of nursery-based childcare a week for a child under two years of age. Parents in Scotland spent an average of £4,368 and Welsh parents spent £4,056.

The Daycare Trust is now calling for an election commitment from politicians from all parties to make a greater investment in childcare...

I vaguely remembered having outed the Daycare Trust as a fakecharity, so I searched my own blog and found this post, showing they'd said more or less exactly the same thing a year ago, and that I'd said more or less everything that I would have said in response to today's article, so that's saved me the bother

Interestingly, last year the Davcare Trust's chosen statistic was that 50 hours of daycare per week would cost over £8,000, but "Children's Minister Beverley Hughes said the survey was based on parents requiring 50 hours of childcare all year round for under-fives, which was 'more than most parents take up or want'." It's good to see that this year they are using a more realistic figure like 25 hours per week.

Rents and taxes - more or less the same thing

NB, for the purpose of this debate, I use 'rent' to mean sources of income that can't be competed away, as opposed to 'normal profits'. The 'rent' of a hire-car or of buildings themselves is not 'rent' for these purposes, but the additional rent that a landlord can charge because the building are on a particular site, or the grey market value of a taxi driver's licence or a pair of take-off and landing slots at a UK airport is.

1. Let's start with a nice simple supply/demand chart, and see how things change if there is an artificial restriction on supply (see 2.) or if a sales tax, such as VAT is introduced (see 3.):
2. I have a grudge against barriers to entry imposed by legal restrictions on the number of competitors (i.e. taxi drivers in London or landing slots at UK airports), especially where that industry is being subsidised and needs barriers to entry to stop those subsidies being competed away (e.g. nurseries, see update at end of this post), and worst of all are those industries that only exist because of a totally unnecessary regulation in the first place (such as removal of nigh-harmless white asbestos from buildings), who also want subsidies and barriers to entry (see update at the end of this post).

As you can see from the chart, if supply is restricted to less than its equilibrium level, the consumer (that's all of us, by the way, not some abstract concept) has to pay higher prices, generating super-profits for incumbents and people who would otherwise have entered the market are unemployed (or are forced to do something less profitable elsewhere). The super-profits have a significant capital value, for example a London taxi driver's permit or a landing slot at Heathrow.
3. All these bad effects are more or less exactly the same as what happens when you introduce a sales-tax, unless demand is very price inelastic, which applies to fuel, alcohol and tobacco duties. Politicians get away with imposing such 'sin-taxes' because nobody dares stand up for drivers, drinkers or smokers, but they get a tick from economists as well because these duties don't affect behaviour very much.

Apart from that - where supply and demand are both elastic, imposing VAT is not some harmless 'tax on consumption' (despite what decades of brainwashing by the EU says, or centuries of brainwashing by British governments before then) but reduces the profits of business and puts people out of business, as the chart illustrates:
The only difference between the second and third charts is that in the second chart the incumbents are getting the extra revenue and in the third it is the government, but from the point of view of consumers or people who are prevented from earning their livelihood, the effect is more or less the same.

Which is yet more evidence to support the generalisation that rents and taxes are the same thing, it just depends on how narrowly you define rents.

Fakecharity, Blulabour miss the point

The BBC informs us that Childcare fees continue to rise. "Many parents in Britain are paying in excess of £8,000 a year for a full-time nursery place, a survey suggests", which is probably factually correct.

What strikes me is that £8,000 (which is on the high side, see comment from Beverley Hughes, below) is more than typical school fees at better-value private schools. So, if parents can afford to pay for nursery places, is it unreasonable to assume that most of them could also afford to pay for private schools?

As I have discussed before, there are loads of overlapping schemes to subsidise nursery care, which average out at about £70 per child per week (which is what makes nursery places affordable for most). To save all the admin and faff and distortions, I think they should be replaced with flat rate vouchers of £70 per child per week, but hey.

To summarise, the vouchers system 'works' for private nurseries (although with flat rate vouchers it would work much better). The obvious conclusion is that we could replace the whole State education system with vouchers as well - £3,500 per child per year seems a good place to start, which would halve the cost to the taxpayer - the education budget plus Teachers' Pensions is about £70 billion and there are ten million school age kids in the UK. That's a handsome £1,000 tax cut for each taxpayer, so a working couple would have £2,000 a year extra to pay towards the cost of nurseries or school places.

That's how we see things on Planet Wadsworth.
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But what does the BBC do? They turn straight to fakecharity number 327279 The Daycare Trust. Their spokeswoman spouts the inevitable:

"It is crucial that parents claim all the help they are entitled to, and that the government increase the free childcare entitlement to include all two-years-olds. The current review of tax credits should increase the maximum proportion of childcare costs the poorest parents can claim from 80% to 100%."

A quick glance at Note 3 to their accounts shows that they receive £600,000 a year from The Department for Children, Schools and Families for 'Policy, research and other projects'. They can get their policies for free from this 'blog. What do they do with the rest of it?
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Bizarrely, Nulabour Children's Minister Beverley Hughes seems to more up to speed than her Blulabour counterpart.

Beverly Hughes points out "the survey was based on parents requiring 50 hours of childcare all year round for under-fives, which was "more than most parents take up or want" [and] the survey did not acknowledge the tax credit system for working parents or childcare vouchers offered through employers. The early years grants, available for children in the term after their third birthday, was also ignored...".

You might expect Blulabour to favour vouchers, but no, they just want more complications and more means-testing ....

Shadow families minister Maria Miller said: "The government must do more to make sure more families who are eligible for childcare support through the tax credit system actually receive it. At the moment, the system is overly complicated and that means only one in four families who are eligible are actually claiming the credit."
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UPDATE. Re NC's comment that regulations are driving up prices. Nulab love regulations as it creates jobs for The Righteous. There's very little need for this of course - when you choose a school or a nursery, you talk mainly to other parents about experiences they've had - as long as your child sets off happily and comes back happily, the nursery is probably doing the right thing. Further, if a nursery were involved in some gross negligence, it would be all over the newspapers and people would take their children elsewhere, so simple information sharing makes most regulations unnecesary.

But the real force for increasing regulation is economics. The nursery cartel likes subsidies of course, because it enables them to put up prices. However, in the absence of barriers to entry/restrictions on supply, these super-profits would be competed away by new entrants. So for existing murseries to benefit disproportionately, they need subsidies AND barriers to entry, which they cunningly dress up as being "for the chi-i-ildren".

Oh, so they've noticed!

Yet more hand wringing about 'child poverty' over at the BBC. This is the best bit:

"A spokeswoman for the Department for Children, Schools and Families said the government was committed to the cause. She said: "We have lifted 600,000 children out of poverty...

Nope, the taxpayer has. And it is the self-same tax system that is pushing low and average earners back into poverty.

... we are introducing free nursery education for all two, three and four year olds ...

Not true. The much-vaunted 'free' nursery education only pays for two-and-a-half hours a day.

... and have seen an increase in educational outcomes at all ages" ...

Not sure whether I should dignify that with a response.

... She said local authorities and other service providers had to help it raise family incomes, encourage people to apply for tax credit and benefits and help parents work. She said the latter was known to be one of the best ways for families to get out of poverty."

WTF? Getting a job and earning your own money is "one of the best ways ... to get out of poverty"? Not, er, "the only way"?

Lies, damn lies and Early Education Funding

Besides the Employer Vouchers and the Childcare Element of Working Tax Credits, there is of course the grandaddy of them all, Nursery Vouchers, introduced by the Tories in the 1990s, subjected to the usual local/national government and left/rights spats, and promptly scrapped by Labour in 1998 and replaced with ... er ... Nursery Vouchers. Only they were renamed, then rebranded Sure Start, then split off again as Early Years Funding and for the past couple of years have been known as Early Education Funding.

As an alternative to Sure Start (two-and-a-half hours free nursery a day at a State nursery for three and four year olds), which might give Mum a nice break in the morning but is no use to a woman with a job, you can choose the vouchers instead. Despite some confusion over how the amount affects your nursery bill, in practice it's relatively straightforward. All the parent has to do is tick a box and the nursery claims 39 weeks a year x 12.5 hours x £3.30 (the £ figure appears to vary by local authority), divides it by 52 and knocks £30-odd off the weekly nursery bill for kids aged three or four.

The vouchers are non-contributory, non-taxable, non-means tested, and in my experience, the scheme works fine. As The Lass started private school before she was five, her school deducted the vouchers from the first term's fees. Sweet.

So what have we got ... the vouchers worth £30 per child per week (as long as they're three or four years old); the Childcare Element of Tax Credits that are worth a maximum of £44 per child per week (much less in most cases) for an average income family (but are savagely means-tested); and Employer Vouchers which are no use to an average income family but are worth about £23 per week to a higher rate taxpayer (let's assume one working parent per child for simplicity) who qualify for next to nothing in Tax Credits.

Hey ... I've an idea, can't we scrap all the overlaps, chuck all the schemes into a pot, stir it round a bit and replace them with vouchers worth £70 a week for each child aged two to four or something?

Lies, damn lies and Childcare Tax Credits (2)

Continuing the theme of my previous post, from quango The Daycare Trust* comes this:

"New legislation is being introduced in April 2005 to encourage more employers to offer staff support with the cost of registered and approved childcare. It aims to encourage more employers to offer support with childcare costs through salary sacrifice schemes, either in the form of [tax-free] childcare vouchers [of up to £55 per week] or direct payment schemes."

Let's assume that one of the parents agrees with their employer that their gross wages will be reduced by £55 per week and they will receive tax/National Insurance-free nursery vouchers worth £55 instead - hoping, of course to save the PAYE on £55 (=£17, not to be sniffed at, you might think). The couple also dutifully complete and submit a revised Tax Credits claim form, which is promptly and efficiently processed by HMRC. Again, ignoring the income disregard, which makes a mockery of the whole concept, this is what the net effect will be (per week):

1. The parent's net employment income goes down by £55 less PAYE, or £38 per week
2. The nursery is happy to accept the £55 vouchers and reduces the weekly nursery bill by £55
3. The amount of £55 is deducted from nursery costs for purposes of the Tax Credit claim, but as only 80% of those costs are taken into account, the amount reimbursed via Tax Credits (before income taper) goes down by £44.
4. As the couple's gross income has gone down by £55 per week, the Tax Credit income taper goes down by 39% x £55 = £21

Once the dust has settled, the couple has lost £38, gained £55, lost £44 and gained £21. Overall they are £6 worse off. As it happens, the employer saves 12.8% x £55 Employer's NIC = £7, but the overall gain of £1 is nowhere near the administrative costs and hassle involved.

You can check this using HM Revenue & Customs Fun Online Calculator.

I've wrapped up the story here ... for now.

* As WOAR pointed out in the comments to an earlier post "In the accounts 2006 ... income came from: Unrestricted grant received from the Association of London Government £114,116 (see p.12) and ... Department for Education and Skills Surestart Unit £330,642, Inland Revenue £15,000. There are other headings which might be public sector but it is difficult to tell - the names or headings do not make it immediately apparent."

Lies, damn lies and Childcare Tax Credits

I was reading an article by the Low Incomes Tax Reform Group this morning, which reminded me how 'misleading' the following propaganda is:

From HMRC's Q&A
Q: "Can I get help with the costs of childcare if I’m working?"
A: "The childcare element is worth up to 80p in tax credit for every £1 a week you spend on approved childcare".

Woah! "Up to" sounds good, doesn't it? But you need to be earning the income first to generate the net income to pay for a nursery. Let's assume that one parent is in work and earns £20,160 per annum, the PAYE deducted is £4,562, leaving net employment income of £15,598. The other parent is at home with two young children and the household also qualifies for £3,628 in Tax Credits per annum.*

Now let's assume the non-working parent decides to go back to work and puts the two children into a nursery costing £300 a week in total** (the maximum eligible amount for Tax Credits). That parent also finds a job paying £20,160, so knows that the tax deducted will be £4,562 and the net income will be £15,598, just enough to pay for the nursery places. (Let's assume that the parent who returns to work finds a job locally, so travel costs aren't an issue, and is happy to break even on the deal because the kids are learning to socialise and the parent knows that long career breaks are bad for future earnings potential etc.)

The parents then resubmit their Tax Credit claim, and, ignoring the income disregard which shelters them for up to a year, they are now entitled to Tax Credits of £8,186.

That's £4,558 extra Tax Credits per annum*, or about 30% of their actual nursery costs. Mathematically it is impossible to get anywhere near 80%, because the Tax Credits are withdrawn at 39% of your gross income above a certain threshold, on top of 31% PAYE.

To put it another way, let's assume that:
1. The £300 weekly upper limit for childcare costs for two children and also the actual nursery fees for both children go up by £4 a week, and
2. Coincidentally, one parent gets a pay rise which is just enough, after deducting PAYE and adding additional Tax Credits, to cover the extra £208 nursery costs. That equates to a £140 per annum pay rise, minus 31% PAYE is additional net employment income of £99.

The potential extra tax credits of £166 (£4 x 52 weeks x 80%) are reduced by 39% of the extra £140 gross income, i.e. £166 is reduced by £55 to £111. That's 53% of the additional childcare costs.

Check - £140 minus £43 PAYE plus £111 tax credits = £208.

The story continues in my next post.

* And £1,634 in Chid Benefit, so PAYE paid less Tax Credits and Child Benefit is a net payment of £700 to the household. So a £10,000 tax-free personal allowance and a transferable non-working parent's allowance of £10,000 could replace the whole morass, for example.

** After deducting Early Education Funding where applicable, of course.

*** Ironically, those extra Tax Credits are pretty much equal to the PAYE deducted from the now working partner's salary.

"Nursery fees rise ahead of inflation"

Well of course they bloody well do! Nurseries are very labour intensive, so you'd expect prices to go up in line with wages, which usually increase faster than headline inflation - it's called 'productivity growth'.

Further, they are comparing price rises of 5% with CPI inflation, which is a meaningless measure, the price rise is barely more than proper RPI inflation.

I'm also disappointed that the FT fell for this "free nursery places for three year olds" nonsense, children of that age can choose between 2.5 hours a day free nursery (which is hardly enough to enable a Mum to go back to work) or vouchers worth about £7.50 a day.

Must try harder! 4/10.

Lies, damn lies and NuLabour f***ing lies

I am disappointed to see the MSM trotting out this bit fat f***ing lie:

"The government has introduced free nursery education for all three-year-olds"

What actually happens is, if you have a child aged 3 to 5, you can choose between
a) up to one session of 3 hours (or is it two-and-a-half?) free nursery per day (not 15 hours per week!), or
b) about £7.50 per day (not £37 per week!) in nursery vouchers to be used at whatever private nursery you like.

Remember that an average full time nursery place costs £150-plus per week.

Finally, my little girl's nursery told me that they are discouraged from actually teaching them anything e.g. writing, so it's hardly f***ing surprising thay none of this has made any difference.