This article is from the July issue of Total Politics

Childcare is likely to be a heavily-contested policy area at the next election.

All politicians agree that improving provision and bringing down costs is essential for families feeling the pinch. There are also significant benefits in boosting employment, reducing child poverty, and improving early-years development, but with all parties committed to making further cuts after 2015, there are serious questions about where the money will come from.

And while there’s agreement on the problem, there’s no consensus on the solution.

Childcare has become an expensive business in Britain. Across the rich world, a family with two average earners tends to spend 12 per cent of their income on childcare. In the UK, the same families spend 27 per cent, the second-highest rate in the OECD.

In light of this, a British mum returning to work sees less than a third of her income once childcare costs have been taken into account, compared to nearly half elsewhere.

Although the most recent labour market statistics were encouraging, Britain still has a serious unemployment and under-employment problem, with women bearing the brunt of the pain.

There were 2.63 million people unemployed in the first three months of 2012 but while this fell 45,000, just 3,000 of these were women. There are now 1,418,000 people working part-time who say that they want a full-time job – over half of them are women.

The UK now ranks 15th in the 32-member OECD in terms of female employment, which is largely explained by a far lower share of mothers in work compared to women overall. Making it easy for mums to return to work after having children is the best way to address the ‘motherhood penalty’ in employment prospects and wages.

Countries with the highest female employment rates, like Denmark, Iceland and Sweden, have publicly-funded systems of affordable, universal childcare, as well as parental leave arrangements that allow both parents to combine work and family life. Britain, by comparison, has the highest share of children without a working parent in the EU.

This is directly linked to the risk of unemployment, low pay and poor health, creating a very real poverty trap. The Joseph Rowntree Foundation thinks that affordable childcare has the potential to halve child poverty by getting women back into work.

As well as bringing income into the home, good childcare helps children to develop. One large-scale government study found that infants who had high-quality early-years provision achieved better results in language, reading and numeracy.

Children from deprived backgrounds benefited the most.

In government, Labour put significant resources into childcare through tax credits and increasing guaranteed provision for three and four-year-olds. But this remained patchy for under-threes, with huge variability in quality.

The coalition has been schizophrenic. They’ve promised to add an extra 130,000 free places for disadvantaged two-year-olds but reduced childcare tax credits at an average cost of £450 for half a million parents, and up to £1,300.

So what’s to be done? Liz Truss, the MP for South West Norfolk, has an elegantly Conservative proposal based on “freedom and choice”. Her argument is that supply was constrained because government spending on childcare was wasted on unclaimed tax credits, and childminders were wrapped up in the red tape. Instead, she suggests Britain should follow the Netherlands and deregulate the childcare market to boost supply and bring down costs.

The inconvenient truth for Truss is that the number of childcare places rose by 644,000 from 1997 to 2010. Meanwhile, the reduction in the number of childminders and increased costs had nothing to do with deregulation. Experts in the field, Eva Lloyd and Anand Shukla, have found that business rates, VAT, and reduced parental demand for places are actually the main causes.

Truss’s proposal fails to address social mobility. A market system would mean that poorer families get lumbered with under-qualified carers while wealthier families get the highest quality provision, setting back social mobility. Indeed, in the Netherlands, reviews have found a steady deterioration in childcare quality since deregulation started in 2005. Consequently, the government is reversing its position and re-introducing a set of enforceable regulations.

Another Tory proposal, which David Cameron calls “hugely attractive”, is making childcare tax-deductible. This, however, would be highly regressive and expensive, with most of the money going to wealthy parents who already use childcare rather than to poorer families, who pay less tax but still cannot afford childcare.

In the words of his colleague Claire Perry MP: “It would amount to a huge tax giveaway to people that can afford it.”

A far better solution is the introduction of free universal childcare for all one to four-year-olds. Research by IPPR has modelled the costs of 25 hours of provision per week and shown that this would provide a net benefit to the taxpayer of between £4,000 and £20,000 over four years for every mother who returned to work.

Although the taxpayer would benefit in the medium term, the total cost would be close to £7bn over four years, as quality and quantity were raised. Restricting pension tax relief to the basic rate of 20 per cent would more than cover these costs, but there may be other demands on that income. Freezing child benefits and scrapping universal provision of winter fuel allowances and free bus passes for pensioners would therefore make up any shortfall.

These would not be easy choices, but by rebalancing government expenditure towards childcare, Britain could help improve maternal employment, child poverty and early-years development.

To ensure that social divisions are not entrenched, a universal solution would be far better than going down a market-based route.

This also has the added benefits of keeping provision in the community rather than behind closed doors.

Will Straw is an associate director at IPPR

Tags: Childcare, Ippr, Joseph Rowntree Foundation, Liz Truss, OECD, Will Straw