The Government is Quietly Nationalising Childcare
“In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so.”
– Adam Smith, The Wealth of Nations, Book II, Chapter II
In its 2024 manifesto, the Labour Party pledged to add 3,000 new nurseries, attached to existing primary schools. That would mean thousands of state-funded childcare providers entering the market, built and operated by the government.
As should be asked of any new government proposal, why is this necessary? Presumably, there must be a shortage of nursery spaces, but why isn’t the market stepping in to fill the gap?
In truth, the market isn’t failing, but is being prevented from working properly. Nurseries across the UK are closing their doors, not because demand is low, but because government mandates are making business impossible.
In England, childcare providers are required to offer 30 hours per week of “free” childcare for 3- and 4-year-olds, with the government reimbursing them at fixed rates. For 92% of them, these rates are below the cost of provision.
The result is predictable. Nurseries either charge parents additional fees to cover their loss, cut corners to reduce costs, or go out of business entirely. A research report by the Department for Education found that “substantial proportions” of parents reported extra charges for additional items or activities, and restrictions on when they could use their free hours. Between 2021 and 2024, the number of UK childcare providers fell from over 72,000 to less than 62,000, an almost 15% decline.
Improving access to childcare is a legitimate policy goal. But doing so by expanding public provision and throttling private operators will reduce choice and competition.
The best way to expand access while maintaining quality and efficiency is to restore price signals and market incentives, not by abandoning public support for families, but by changing how that support is delivered.
A voucher-based system is a better approach. If public money is going to be used to help cover childcare costs, it should go directly to parents, not nurseries. Previous experimentation with childcare vouchers was restricted to a salary sacrifice system through registered employers. The system needed is a more flexible, universal model, direct support to families, redeemable at any provider, akin to a childcare-specific benefit that empowers consumer choice. More costly, but not when compared to current goals to open thousands of government nurseries.
Under a voucher model, each child is allotted a set amount of money to be spent on childcare providers of the parents' choosing. Providers compete to attract parents, just like in any healthy market.
If one location increases their prices, parents can choose whether to pay the difference or take their business elsewhere. If costs rise systemically, the government can adjust the voucher amount to ease the burden on parents, but no nursery will be forced to operate at a loss while waiting for the next budget review. This structure improves affordability while allowing providers to price their own services and cover their actual costs.
Importantly, a voucher system could also accommodate targeted subsidies. Families on lower incomes could receive larger vouchers, ensuring equitable access without disrupting provider practices.
Admittedly, offering free childcare is more stylish than this voucher system. It looks better on colorful manifestos and in campaign speeches. But it is an unsustainable, damaging promise, and will always be inevitably accompanied by vows to build more nurseries to fill the ever-growing shortage.
Some argue that public nurseries can coexist with private ones. This view misunderstands the dynamics of competition when one side is taxpayer-funded and the other is price-controlled.
Private nurseries are already being squeezed by underfunded mandates. Adding 3,000 new taxpayer-funded competitors to the market risks driving many of them out altogether. Parents may soon face fewer options, especially those with preferences outside the public nursery model (longer hours, different curricula, religious beliefs, etc.). If we want high-quality, affordable, available childcare that meets the needs of diverse families, we need a market system that rewards flexibility and quality, without interference.
The government has managed the childcare industry poorly. Don’t let them manage your children.
Corrigan Peters