IFS: Policies to tackle the cost of childcare need to be honest about the minority of parents with pre-school children who will benefitBut more should be done to boost take-up of existing schemes

As part of its response to the cost of living crisis, the government has identified childcare costs as an area it wants to address. New analysis from IFS examines how much families with young children are paying for formal childcare in England.

A key finding is that more than half of families with pre-school-aged children pay nothing in childcare fees. Greater support with childcare costs could help these families use more formal childcare, but will do nothing to ease existing pressures on their budgets.

However, some families face childcare bills that are high in comparison with their earnings. A quarter of families earning between £20,000 and £30,000 a year with a 1- or 2-year-old in formal childcare spent more than £100 a week on childcare fees for that child – more than 17% of their pre-tax income. Those with several young children could spend much more each week.

This new IFS research, funded by the Nuffield Foundation, provides crucial context for current debates on the cost of living and any future decisions the government will make on childcare support. Using 2019 data from the Childcare and Early Years Survey of Parents, we show that: 

• Families’ out-of-pocket childcare costs are much higher for younger children. Among families using formal childcare for a 1-year-old, half spent more than £90 a week on childcare fees, compared with half spending more than £45 a week for a 2-year-old or under £5 a week for a 3- or 4-year-old.
• These differences by age are largely due to the current system of government support, which provides a much more generous offer to 3- and 4-year-olds. But the main programme supporting the youngest children – tax-free childcare – is not functioning well: in 2019, only four-in-ten parents with a pre-school-aged child had even heard of the programme.
• The cost of childcare is a significant issue for a minority of families – in 2019, 16% of families using formal childcare for a pre-school-aged child reported finding it difficult to manage these costs. But for many families, the cost of childcare does not put major pressure on the household budget: 26% of formal childcare users found meeting their current childcare costs ‘easy’ or ‘very easy’, and a further 41% of formal childcare users paid nothing at all.

These findings suggest that advocates of childcare policies to tackle the cost of living crisis should be honest that a minority of parents would benefit – and that improving take-up of existing programmes is a good place to start. Blanket programmes to reduce the cost of childcare (e.g. by relaxing staff-to-child ratios) will chiefly benefit families currently spending the most – typically those on higher incomes with younger children using many hours of childcare in expensive parts of the country.

Harriet Olorenshaw, Research Economist at IFS and an author of the report, said: ‘Childcare costs are a significant expense for some families, and can place real pressure on the budgets of those whose very young children spend lots of time in formal care. But more than half of families with pre-school-aged children don’t pay anything at all in childcare fees – either because they don’t use formal childcare, or because they use government-funded ‘free entitlement’ childcare hours. If Ministers want to tackle the cost of childcare as part of their response to the cost of living crisis, they need to think carefully about how to target support to the families who need it most.’

Other key findings include:

• The use of formal childcare increases with age. Just over a third of 1-year-olds are enrolled in formal care, rising to nearly 60% of 2-year-olds and 85% of 3- and 4-year-olds.
• Childcare costs are highest among families using full-time formal care for very young children. Among families with a 1- or 2-year-old in full-time formal care, half spent more than £240 per week on childcare fees in 2019.
• The share of formal childcare users finding it difficult to meet their childcare costs is somewhat higher for those on middle-to-high household incomes; a fifth of families earning between £30,000 and £65,000 and using formal childcare say they find it difficult or very difficult to manage their childcare costs (compared with 16% overall).
• Among formal childcare users, median (average) spending per week was highest in the East Midlands (around £40) and lowest in London (under £10). But some families in London pay huge amounts per week – with more than one-in-ten formal childcare users in the capital spending £350 per week or more.
• Tax-free childcare is not supporting as many families as it should be. While over 90% of eligible households are aware of the 15-hour free entitlement for 3- and 4-year-olds, in 2019 only four-in-ten parents of pre-school-aged children had heard of tax-free childcare. Even once the scheme has been explained, nearly 40% of potentially eligible families said they would not apply – often due to confusing eligibility rules or perceived hassle of the application process.
• Childcare ratios are tighter in England than in most other European countries, particularly for younger children. England (and the other UK nations) allows the smallest number of 1-year-olds per member of staff in Europe, and only Norway has tighter ratios for 2-year-olds. Ratios for 3- and 4-year-olds are considerably looser and much less likely to act as a binding constraint; in 2021, at least 40% of providers took on fewer 3- and 4-year-olds than permitted by the regulations.

Eleanor Ireland, Education Programme Head at the Nuffield Foundation, said: ‘Increasing take-up of existing financial support for childcare would benefit both children and parents, particularly as the cost of living crisis means that parents who are currently able to meet their childcare costs won’t necessarily be able to do so in the near future. As this IFS research highlights, less than half of parents with pre-school-aged children even know about the full range of support that is available. This is indicative of the dysfunctional nature of our current system of provision of early education and childcare, which is problematic not only in relation to cost, but also in terms of access and inequality. A move towards a fairer and more sustainable funding model needs to be considered in the wider context of who the system is for and how it can make a difference to the children and families who need it most.’

ENDS

Notes to Editors

The changing cost of childcare is an IFS briefing note by Christine Farquharson and Harriet Olorenshaw. 

You can read the report  here.