Will more govt spending on childcare really help?

The UK government is expected to make childcare free of charge. Parents with young children in the UK spend on average a third of their household income on childcare, compared to just 13% in other countries, according to OECD figures, and 25% of parents in severe poverty in the UK have given up work, and 33% have turned down a job, because of high childcare costs.

However, UK already spends more of its GDP on government support to families than any OECD country except Denmark and France. State-funded childcare in the UK starts at three, or two for lower-income families, but it is limited to 15 hours per week. Some 10% of government support for families goes towards maternity and paternity leave, compared to 17% in Denmark. Around 26% goes on day care, compared to 49% in Denmark. Another big concession is tax credits, which Denmark does not use.

In Denmark, 97% of children aged three to five, and 92% aged one to two are in day care. While around 55% attend centres, the rest are looked after by registered childminders in private homes. Generous parental leave, flexible working hours and the absence of long-hours culture all help families with young children to be able to manage. But childcare is not free. In Denmark, families pay up to 25% of the cost of day care, with those on low incomes or single parents paying less (for the poorest, nothing), with discounts for siblings, and with the government funding the difference.

There is a case for subsidising childcare, if it makes parents able to take a job, rather than depending on state benefits. A paying job is the best welfare programme for families yet devised. But such support should go to the parents who need it, rather than in subsidies for the childcare industry. In our 1995 Pre-Schools for All, we proposed that poorer families would be given vouchers to cover the full cost of a pre-school place, with families on basic and higher-rate taxes receiving proportionately less. “Because the pre-schools provide integrated education and care,” wrote our author David Soskin, “access to them would give many parents the choice of going out to work, reducing dependency on benefits.” The government heeded this advice, but unfortunately, experiment with childcare vouchers became a bureaucratic nightmare – which it need not have done.

There are of course other possible models. In our 1989 report Mind the Children, we argued that employers should be able to provide childcare facilities or vouchers without employees having to pay extra tax on the benefit. We have also argued that the restrictions on home-based childcare are too onerous, raising the cost to unaffordable levels, and discouraging informal arrangements between parents.

If we are to make childcare available to all, instead of trapping poorer families on benefit dependency, then we need to address the costs of regulation and taxation, and to employ market principles and competition rather than dash towards indiscriminate subsidy or become swamped in bureaucratic red tape. Not an easy task for any government.

Fracking, property rights and compensation

A new Infrastructure and Competitiveness Bill, to be announced to Parliament in the Queen’s Speech on Wednesday, will change the UK’s trespass law to allow shale gas exploration firms to drill beneath private property without needing the owners’ permission.

This move will greatly advance fracking in the UK, where there are large shale gas reserves. It will bring major economic benefits, not to mention increased energy security, at a time when the country’s North Sea oil production is tapering off. But there are issues about it, which need to be addressed.

People feel strongly about their property rights, and do not like the idea that people can ‘mine’ underneath it, even if it is a mile or more underneath it. Others are not over-bothered, but maintain that if people are going to drill under their property, they should be compensated. And some people are concerned about what might go wrong, in terms of the geological stability of their land or the pollution of local water supplies. While research suggests that these latter concerns are almost entirely unfounded, drilling under people’s property remains something of concern for them, for a variety of reasons.

The government has tried to address the issue by saying that prospecting firms must make ‘community payments’ by way of compensation, though critics have complained that the amounts being mooted are rather small. But a more important question is whether such collective payments really meet the public concerns at all. If they simply go into the coffers of local governments, to be spent by local politicians on whatever pet social-engineering scheme they favour, property owners will not regard that as any compensation at all.

If public disquiet is not to hamper the UK’s fracking initiatives, compensation should do directly to those whose property is affected. And it must be large enough to convince the majority of them to accept the process. Sending a cheque directly to every home in a village is not such an onerous task. But it is the one thing that would make people accept – and even welcome – fracking under their property, the only practical measure that shows at least some respect for their property rights.

Megafund pensions: tax, regulation and competition

On Wednesday in the Queen’s Speech before Parliament, UK ministers will herald a move towards a new workplace pension arrangement. The idea is for ‘collective defined contribution’ pensions, or CDCs, which the government believes could boost pension returns by up to 39%. Such a plan might have hundreds of thousands of members, all of them pooling their regular pension contributions, giving the ‘mega-fund’ managers far more clout than they have with individual pension arrangements. Denmark and the Netherlands, which already have CDCs, have the lowest levels of pensioner poverty in Europe.

Two things strike me about this proposal.

First, it is a welcome attempt to bring back, in a different form, the highly successful workplace pension plans that the UK used to have before they were taxed and regulated out of existence by former Chancellor of the Exchequer Gordon Brown. Before 1997, huge numbers of employees put part of their salary in workplace pension plans, in return for a defined benefit – normally two-thirds of their final salary. It was a huge success, and the UK private pension sector became larger than that of every other European country put together. But seemingly insignificant changes to ‘advance corporation tax’ in Brown’s 1997 Budget took billions of pounds out of such pension investments each year. Then, much strict solvency regulations – far too strict, in fact, and infinitely stricter than the rules on the government’s own, bankrupt, state pension system – led to the closure of plan after plan.

So my first reflection is, if the UK is going to revive this successful idea of workplace pensions, but on a defined-contribution rather than defined-benefit basis, then it needs to armour them against future tax raids and over-regulation.

The second is that there needs to be proper competition between these new mega-funds. Right now, ministers are unclear on that. The pensions minister, Steve Webb MP, has talked about the pensions industry setting up ‘the’ collective scheme, with the government providing the regulatory framework, and possibly even providing some kind of ultimate guarantee. But while a single collective could provide a great deal of investment clout, it would suffer from the same problems as every monopoly – sloth, bureaucracy, no comparisons on which its success or failure can be measured, leading to bad value for customers.

The right model for CDCs has been around since the early 1990s. Indeed, we reviewed it in the Adam Smith Institute report Singapore Versus Chile back in 1996.It is the Chilean model, now adopted by dozens of countries across the world. In this model, there are many, competing pension funds. Workers may make contributions into whichever they choose, and indeed switch their contributions from one to the other. There is regular reporting, so that contributors can see how their particular fund is reporting. When they retire, their invested savings provide their retirement income.

The popularity of the old workplace defined benefit plans suggests that the new collective defined contribution plans could be highly popular too. But they need to be both competitive and secure from the ravages of future politicians and regulators.

Scotland should have got tax powers years ago

The UK’s Conservative Prime Minister David Cameron is expected to offer Scots the power to raise all income tax in Scotland, if they reject independence at the referendum planned for September. This would make the Scottish Parliament responsible for raising 40% of the revenue it spends, and would be offset by and equivalent cut in the block grant that Scotland receives from the Treasury.

This is a change that should have happened years ago. Critics call the present arrangement a ‘pocket-money parliament’. Its only debate is how to spend the money gratuitously handed down to it by its English parent.

If Scotland had to raise much of its own revenue, however, the debate would change. The discussion would go beyond how to spend money, and embrace the question of how to raise it. There would, for the first time, be a national discussion about how much Scotland should be spending on its government. Taxpayers, both individuals and businesses, would start raising questions about value for money.

That should be good news for Mr Cameron. At last his Conservative Party, presently sidelined and bereft in Scotland and down to just one Conservative MP in Scotland – would have a real role once again. It would become a home for all those who believe that spending is too high, and who resent paying to fund a profligate government.

The business of business is business

It used to be that Governors of the Bank of England expressed their views rarely and elliptically, in an effort not to disturb the markets, which hung on their every word and every nuance. The new Governor, Mark Carney, seems to be trying to achieve the same results by the opposite methods. He speaks so often, and so bluntly in his direct Canadian style, on so many different issues that the markets haven’t the faintest idea which direction they ought to be going in.

The latest is particularly unusual for a Governor. Carney has entered the political debate on equality, citing “disturbing evidence” of declining social mobility in advanced economies, and urging “a basic social contract comprised of relative equality of outcomes; equality of opportunity’ and fairness”. Nowhere is the need to be fair and trusted more acute than in the financial markets, he said.

This is worrying. It is a fair point that if people do not regard their bankers – and other suppliers – as trustworthy, that is bad for business all round. The market system relies on fair dealing and trust. But quite what social outcome the market system does or should produce is a matter for politicians rather than central bankers. (Well actually, as Hayek shows us, the outcome should not really be a matter for politicians either, but it sure as eggs is not the right subject for central bankers to opine on.)

It is worrying to in that the Bank of England regulates the commercial banks, what message is it sending to them? The suggestion that banks and bankers have some kind of obligation to promote “relative equality of outcomes” seems at odds with the Bank’s other instructions that they should strengthen their balance sheets and be prudent and businesslike in their operations. Banks, after all, cannot escape risks. So yes, they should lend wisely. Yes, they should borrow prudently. Yes, certainly, they should comply with the law. And they should adhere to ethical standards – keeping their word, not lying to customers or misleading them, being sensitive to the interests of clients and making sure that those interests prevail.

But is it the proper role of any business to promote any particular social objective? Professor Norman Barry, in his Adam Smith Institute paper of many years ago, Respectable Trade, pointed out that in a properly competitive market, firms would have no cash spare to spend on such agendas, if they had no direct effect on their business. In banking, though, the situation is even trickier, because of the world of risk in which they live. Should banks promote particular social object, regardless of the extra risk that involves? The risk of not borrowing quite so prudently nor lending quite so wisely? That, after all, is what got us into the mess of 2007-08. Coerced by their regulators, American banks started lending to homeowners who could not afford the loans. While in the UK the former building societies, spurred on by politicians for reasons of ‘regional policy’, got quickly out of their depth with some very bad borrowing.

The business of business is business, not civics. Civics is the business of politicians. And something that central bankers should probably steer well clear of.