Universal Childcare in Northern Ireland

Introduction

PwC was commissioned to conduct a cost-benefit analysis of three models of public subsidy of childcare applied to Northern Ireland. This report along with its appendices represents the results of our investigations. Our working hypothesis was that improving childcare affordability by way of increased childcare subsidies would also increase maternal employment and hence generate quantifiable benefits in excess of quantifiable costs. Cost-benefit analysis was used to test that hypothesis.

Why the extent of public subsidy of childcare matters

The extent of public subsidy of childcare was of interest given its potential impact on the affordability of childcare. If the subsidy were increased this could increase affordability which in turn could increase employment, especially in terms of the labour supply of mothers with dependent children. Any such increase in maternal employment would be of particular interest in policy terms given the possible associated social and economic benefits:

• The social benefits include a reduction in child poverty; international comparisons suggest that countries with relatively high rates of maternal employment tend also to have relatively low rates of child poverty.
• The economic benefits include the increase in output which follows from the increased labour supply. In this cost-benefit study we focused mainly on the economic effects as these are the ones which are most readily quantified.

Admittedly, there are some caveats on the extent of such potential benefits. For example, the accessibility of childcare may be determined in part by non-price factors as well as affordability. Moreover, the extent of availability of childcare is not the only factor which determines maternal labour supply. The ability of the labour market to absorb the extra labour supply is unclear. Rates of child poverty are also determined by factors other than the maternal employment rate.

Nevertheless, a case for public subsidy for childcare could be made on the basis that a range of groups is likely to benefit and it is possible the sum of such benefits would exceed the cost in terms of increased public spending:

• Parents, especially mothers, could benefit in terms of the incentive to increase their labour supply, either in terms of entering employment or working for longer hours. There could also be a longer term benefit to mothers with dependent children in terms of a reduction in the extent to which they have to take sustained breaks from the labour market. Any reduction in such career breaks could lead to an increase in average earnings over a lifetime.
• Children could benefit in terms of a boost to early years education leading to accelerated cognitive and behavioural development.
• Government could benefit to the extent that there are improved social outcomes, especially over the long run, perhaps in terms of diverting children away from future social problems, e.g. poverty, educational underachievement, unemployment and crime.
• Employers could benefit through any increase in the supply of labour.

However, all these potential benefits are subject to caveats. For example, how far will labour demand be able to keep pace with increased labour supply? Or, how far, is the provision of childcare sufficiently integrated with early year’s education and how far is it of sufficient quality to ensure the impact on the behavioural and cognitive development of children is positive rather than negative?

The likelihood that the benefits are spread across the four groups, parents, children, government and employers, is indicative that there is a case for some subsidy of childcare but not 100% subsidy. Given that parents (especially mothers) and employers are likely to gain, as well as government, there is a case for all these groups making some contribution to covering the costs.

Childcare: International comparisons

A review of the literature indicated the following important points relating to the context for considering the models of subsidised childcare:

• Those OECD countries with the highest maternal employment rates tended to have the lowest rates of child poverty.
• It is implied that the charge for childcare in Northern Ireland as a percentage of the average wage was higher than the UK or OECD average.
• The rate of child poverty in Northern Ireland was considerable in absolute terms and high relative to that in the Nordic countries. It was less clear whether it was higher than the UK average (this may depend on how poverty is defined).
• Northern Ireland’s maternal employment rate in 2011 was higher than the OECD average. It was also indicated to be higher than the UK average. The Northern Ireland rate was also higher than both the OECD and UK average in 2009 but in that year the difference was marginal.
• Studies of childcare systems in various countries point to some of the desirable features for a system of childcare provision; low child:staff ratio, affordability including affordability from the point of view of middle income parents and the use of a curriculum to guide the educational content of the childcare.
• Childcare, especially high quality childcare, may have substantial, positive and long lasting impacts on individual children.
• Importantly, some of these benefits include possible diversion away from future social problems, e.g. poverty, welfare dependency and criminality.
• The optimistic view is that over the long run, public spending on childcare in effect pays for itself, given both longer term social benefits and also public spending avoided because certain social problems are reduced.
• This assumes government can borrow to pay for the spending in the present and is able to wait for such long term pay back.
• At the same time, in drawing lessons from such international studies, many of which relate to the US, it remains unclear how far it is legitimate to generalise the findings of studies which often relate to the application of childcare to narrowly defined groups, e.g. the socially deprived. The question remains, what would happen if childcare were provided on a universal or close to universal basis?
• Some of the other longitudinal studies, particularly those relating to Quebec imply there may be negative impacts on some children in terms of slowing down or even reversing behavioural or cognitive development.

In this context it may be significant that the level of spending per childcare place in Quebec is much lower than that in the Nordic countries.

To sum up, the international data were suggestive of two relationships that may be of great interest to policy makers in Northern Ireland. First, as childcare becomes more affordable, maternal employment rates tend to be higher. Second, as maternal employment rates increase, rates of child poverty decrease. Such relationships are, however, general tendencies. It may be significant that in 2011 the rate of maternal employment in Northern Ireland was already above the OECD average, at the same time the rate of child poverty was probably about average within the OECD or just below that average.

Selecting childcare models

In order to reflect the terms of reference of this project, we considered a very highly subsidised publicly funded model of childcare and what impact that might have if applied in Northern Ireland. We used the system of childcare in the Canadian Province of Quebec to represent such a system.

We also considered the Danish approach to public subsidy of childcare and what impact that might have if applied to Northern Ireland. In Denmark roughly the first 75% of costs are paid for by the Danish local government authorities and remaining cost may be subsidised. That further subsidy is means tested. The Danish approach to childcare is associated with some very favourable outcomes, amongst the highest maternal employment rates and lowest child poverty rates across the OECD, and also some of the highest levels of public spending per childcare place in the world.

We selected a third model of childcare provision for consideration of the potential impact in Northern Ireland. The intention was to devise a model which was distinct not only from the UK but also from the Nordic countries and Quebec, especially in terms of having a rate of subsidy which was above that in the UK but below that in the Nordics. The detailed OECD data, and other sources, were used to consider 15 countries and then a shortlist of four was produced; Netherlands, Slovenia, France and Australia. Those four tended to be characterised by levels of public spending on childcare which were lower than those in the UK and also, in most cases, more favourable outcomes.

The Netherlands were selected as the third model. This choice was justified partly by the level of public spending per childcare place being less than that in the UK; especially once the impact of the levy on employers in reducing required public funding is allowed for. This choice was also partly based on the maternal employment rate being considerably higher than the UK, and partly on the unusual, and therefore interesting, feature of a childcare levy paid by businesses. It is useful to take the opportunity to evaluate what impact such a levy might have.

Attempts to apply such models based on other countries to Northern Ireland are subject to the caveat that the policies may not be readily transferrable in international terms. Danish childcare policies are just one part of a wider Nordic model in terms of social, welfare and labour market policies. The Denmark model relates to an economy which has a much higher level of productivity, wages and GDP per capita than Northern Ireland. There may be ways in which the Quebec and Netherlands models provide lessons for Northern Ireland as to policies to avoid, e.g. in terms of the possibly negative impact on child development of low quality childcare (Quebec) or the implied reduction in demand for labour which would result from a childcare levy on businesses (Netherlands).

The cost-benefit results for Northern Ireland

The principal benefit that could be quantified was the positive impact on the maternal employment rate. A further quantifiable benefit was the boost to lifetime earnings of mothers. The main quantifiable cost was the increase in public spending with allowance for the extent to which a policy of increased spending on childcare might have the indirect consequence of decreasing other areas of public spending, notably welfare spending.

Source: See Chapter 5

In the case of each of the three models of childcare - Quebec, Denmark and Netherlands - the annual quantifiable costs were indicated to exceed the quantifiable benefits for Northern Ireland, see Table 1. The margin was between £10m to £112m. This was in a steady state or snapshot comparison. By steady state or snapshot we mean the level of annual benefits and costs once the policies have been fully implemented and their full effects have been felt. The steady state or snapshot comparison does not involve discounting. We assumed this steady state would be reached 10 years after the policies began to be implemented in terms of benefits and 8 years in terms of costs.

In order to give a sense of orders of magnitude, a benefit of £535m would be equivalent to about 1.8% of the total gross value added (GVA) of the Northern Ireland economy. By implication, a net cost of £10m would be negligible percentage of total Northern Ireland GVA; much less than 0.1%.

Our working hypothesis had been that increased childcare subsidies through increasing affordability would also increase maternal employment and hence generate quantifiable benefits in excess of quantifiable costs. The results of the cost-benefit analysis did not support that hypothesis.

It is important to stress that each of the three models yields a stream of quantifiable benefits over future years alongside associated costs. Some of the benefits, notably the boost to lifetime earnings, will be felt over the long run. In order to compare the total value of such benefits and costs we discounted both streams into what would be the equivalent sum of money in 2014, i.e. the net present value (NPV).

Over the very long run, after discounting, quantifiable benefits still fell short of costs, see Table 2, below. In other words, the NPVs are substantial and negative; indicative of a net cost. None of this is surprising and follows from the results presented in Table 1; in the steady state quantifiable costs exceed quantifiable benefits so discounting over 60 years produces a substantial negative number.

Source: See Chapter 5

For each of the three models a sizeable fiscal deficit was implied indicating that any increase in public spending would be substantially greater than any increase in tax receipts which might be generated. A substantial deficit in the range about £260m to £285m was indicated. Such a deficit would be even greater if attention was limited to the gap between devolved spending and taxation, i.e. most of the increased tax revenues related to tax streams which are not devolved. When the deficit was estimated relative to those tax revenues which are currently devolved then it was indicated to be in the range £389m to £526m.

Qualifications to the cost-benefit results

First, in addition to the quantifiable costs and benefits there are also some benefits and costs which could not be quantified and some of these could be important from a public policy point of view. On the benefit side, these included any reductions in child or adult poverty or income inequality which might be a consequence of a system of subsidised childcare. At the same time, if non-quantifiable aspects are to be considered it might also be necessary to make allowance for the non-quantifiable social costs such as any reduction in parental choice and any increase in personal taxation.

Second, there may be concerns about the quality of some of the underlying data for Northern Ireland, especially regarding the maternal employment rate. The use of a sample-based data set, the Labour Force Survey, implied that some figures fluctuated substantially on a year to year basis.

Third, we have abstracted from any differential impact relating to the method used to apply the subsidy to childcare costs, for example, whether this would be done in terms of a cash grant to parents, a cap on charges or through tax credits or reliefs.

Fourth, we assumed the growth in demand for labour would absorb any extra supply of labour produced as a result of the incentives provided by more affordable childcare. We did assume that extra demand for labour would be weighted towards part-time employment in the same proportion as existing maternal employment is divided between part-timers and full-timers.

Fifth, the sensitivity of the results to some of the assumptions made. Our general approach in making assumptions was that these should be more likely to overestimate rather than underestimate benefits compared to costs.

Sensitivity analysis

It was possible to test how far the measured net cost was to variation in some of the key assumptions. The sensitivity analysis confirms that many of the assumptions made tend to underestimate the extent of net costs.

At the same time, for both the Quebec and Denmark models if part-time childcare costs were 50% of full-time ones this would bring the results to a break-even point, i.e. benefits at least as high as costs. However, given that in 2013 part-time charges were indicated as 74% of full-time, we do not regard an assumption of part-time costs as 50% of full-time as realistic.

For the Denmark model the assumption that 60% of the gap in maternal employment rates between Northern Ireland and Denmark could be closed would be sufficient to imply a small net benefit. That assumption may be plausible.

Conclusions

When quantifiable costs and benefits were considered the results were unfavourable for each of the three models of subsidised childcare:

• Costs exceeded benefits albeit by a small margin; between £10m and £112m annually.
• Over the very long term, 60 years, the quantifiable costs exceeded the benefits; a negative NPV of about £0.7bn to £2.7bn, depending on which model is being considered.
• A sizeable fiscal deficit was implied for the UK government and especially for the Northern Ireland

Executive. One consequence of the extra employment and output which results from subsidised childcare is an increase in tax receipts but that increase falls far short of the public expenditure cost of the childcare. In fact, for the Northern Ireland Executive the net impact on funding for public expenditure could be as high as £526m annually. Admittedly, the Executive could probably offset some of that deficit by reducing the spending on the existing programmes whereby it subsidises childcare; we estimate up to £129m could be contributed in that way.

Whilst this analysis suggests the economic case for subsidised childcare is not strong, there is a social value relating to some of the less readily quantifiable benefits such as any reductions in child or adult poverty. This implies policy makers will have to evaluate whether such social benefits are likely to be sufficiently large to compensate for the deficit in terms of quantifiable benefits relative to costs or of increased public spending compared to increased tax revenues.