Published:

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute.

Childcare is a hot topic again. Boris Johnson allegedly sought donations to finance a nanny to care for his son. In the U.S., Joe Biden plans to cap how much low and middle income families spend on childcare as a percentage of income, with the federal government covering the rest and funding pre-school for three and four year olds. All this, we are told out here Stateside, will reduce costs for parents, help child development, and facilitate mothers returning to work.

Which is funny, because we heard similar claims in the UK, where there is already up to 30 hours of government-funded care for three and four year olds, as well as subsidised care for disadvantanged two year olds. That’s in addition to Sure Start centres in places, “tax-free childcare”, support for school-based after-school care, and childcare cost relief through Universal Credit.

And yet Johnson’s worries about childcare costs sparked much hand-wringing anyway, with high prices variously described as a “devastating tax on motherhood” or evidence of long-neglected “social infrastructure.” The consensus takeaway, as ever, is that high prices necessitate yet more government support.

Come on, guys. Is anyone actually thinking in a joined-up way about the impacts of this snowballing state takeover of childcare? Subsidies don’t make something inherently cheaper. At best, they change who pays for it, while driving up prices for those ineligible for the programmes through pumping up demand. Far from the lack of state intervention being the problem, it’s obvious that government policies are driving up costs and eliminating options for parents.

A free society should produce a wide array of childcare options, with everything from parental and grandparent-provided informal care, right the way through to round-the-clock pre-school, if that is what parents want.

Yet governments have sought to professionalise and formalise the sector through heavy regulation, constraining supply, while then subsidising demand. This has brought a whole host of dissatisfaction, as well as rising market prices.

Yes, childcare is a labor-intensive, personalised service entailing the care of something parents value highly. As we become richer, we tend to spend more on higher quality services. Wealthier families, in particular, like the idea of care not just being about minding children, but as a form of early education. That sort of “quality” costs money. But present government policies push towards entrenching these preferences for everyone, stamping out cheaper options and raising out-of-pocket prices.

Looking after children need not be particularly expensive, given the reserve army of stay-at-home parents who could scale up to care for another kid. But if money is exchanged and the child is cared for in the friend’s home, the government dictates that person must apply to be a registered childminder, going through childminder registration, extensive training, Ofsted inspections and more.

These expanding supply-sapping constraints, coupled with subsidies for nurseries that crowd out childminder demand, have seen registered numbers plunge from 103,000 in the mid-1990s to less than 40,000 by the pandemic’s onset.

Restrictions on childcare supply don’t stop there, of course. Brexit has undermined the au pair childcare option, whereby a young foreigner, usually from the EU, lived in your house, obtaining free lodgings in exchange for a modest payment of £5,000 per year to learn English while providing regular childcare. Now applicants must go through the new visa route for a skilled occupation, which requires a salary of at least £20,480. This raises the cost to something comparable with a British nanny, an alternative which itself brings all the responsibilities and paperwork associated with hiring an employee.

Then there are the regulatory restrictions in the form of staff:child ratios across settings, something which the Conservatives wanted to relax early last decade, though their coalition Lib Dem partners blocked them. When such regulations bind, they have the perverse impacts of either making childcare more expensive or reducing wages for childcare workers, by reducing staff members’ revenue-earning potential. From the childcare-specific to the general, “low-skilled immigration” restrictions, minimum wage increases, and tight planning laws all raise the costs of childcare provision too.

Ofsted and governments claim childcare regulations are needed to ensure “quality” – so that carers aren’t overburdened with kids and have the right training to improve child development. But why are governments, rather than parents, the best judges of “quality” here? It seems upper class professionals are imposing their preferences for formal settings on everyone else, with this attempt to “raise quality” bringing the inevitable trade-off of higher prices and fewer affordable providers.

The demand for subsidies and government commitments to deliver “free care” is, in large part, a reaction to this. But subsidies don’t solve the underlying problem of inflated costs making provision uneconomic. Just the opposite, in fact. When governments provide “free” care, they have to cap the rates they are willing to pay, lest providers ramp up prices. Yet these effective price controls are often lower than would-be market prices, putting a big squeeze on even nurseries.

This has perverse consequences. Providers tend to cross-subsidise government-financed rates by charging more for unsubsidised families with older or younger kids. As “free” care has broadened to 30 hours per week for three and four year olds, the opportunities to price discriminate like this have fallen, further straining the viability of many nurseries.

A full 39 per cent of child-care settings said their profits fell as the 15 hours of care for three and four year olds was extended to 30 hours. The Professional Association for Childcare and Early Years warned back then that providers were losing some of their best staff because they were simply unable to increase wages given the level of government payments. Others began to strip back services offered for vulnerable two-year-olds, because these children were relatively less profitable given the tighter regulations on staff-to-children ratios for that age group.

The result: more dissatisfaction. The steady descent into a highly regulated, highly subsidized model has raised market prices for those still paying out-of-pocket, seen some providers go out of business, and brought ever-rising demands for governments to step in with yet higher subsidies or even direct provision. Covid-19, of course, has plunged the sector into more disarray, with discussion of as many as a quarter of providers going under.

It’s time we unwound this costly experiment, rather than doubling down with yet more subsidies. High prices and the restricted availability of childcare is in large part a result of bad policy. Politicians must recognise that, as with housing, they have constrained the supply of childcare and then bid up demand. In doing so, they have not just made out-of-pocket childcare less affordable, but suffocated the sort of pluralism a market would provide.