The Chancellor's childcare announcement made a welcome move to help with the cost of living, says Donald Hirsch. But for those on the lowest incomes, the direction has all been backwards.
If the promised increase in childcare paid to low income families through Universal Credit is all of what it seems, it will help undo the effect of many small cuts for exactly the hard-pressed working families that are the prime target of George Osborne's "aspiration nation". These are low-earning families with children for whom the prospect of a decent living standard has been steadily receding as the cost of childcare has risen and state support for it declined.
An adequate income as specified by the Minimum Income Standard, based on our research on what members of the public think is needed for a minimum acceptable living, has become ever more elusive for families with young children since 2008. Then, a couple with a primary and preschool child each needed to earn £13,900 in order to make ends meet; by 2012 this had risen to £18,400 apiece or nearly £37,000 between them.
The single biggest factor was the government's cut in support for childcare through tax credits, from 80 to 70 per cent. This week's announcement that it will rise to 85 per cent (where both partners earn enough to pay tax) is truly dramatic. It halves the private contribution to childcare, from 30 to 15 per cent of the actual fees.
The reason this is so important is that the existing system puts a very real lid on those aspirations that Mr Osborne cares so much about. Under Universal Credit, once a second earner in a low income family is paying tax, working more hours to improve family living standards is futile. The family will take home only 24 per cent of any extra earnings because of taxation and loss of Universal Credit, and of that, most will be spent paying for that 30 per cent of childcare. Reduce it to 15 per cent, however, and there is at least some return for the extra work.
As well as the previous childcare cuts, this measure helps compensate for increases in the rate at which the Treasury gives families less as income rises, and forthcoming cuts in the real value of Universal Credit due to the 1% cap on annual increments and the freezing of Child Benefit. Increased tax allowances have also helped a bit, although in future much of the gain from these increases could be recouped by clawing back Universal Credit for those who benefit.
The diagram below shows that for some families, these measures together will roughly cancel each other out, in terms of their effect on what people need to earn for a minimum.
However, for families not paying tax, including families who are not working, the direction has all been backwards. So helping "aspiration" is clearly at the cost of those on the lowest incomes. And most of the benefit both of raising tax allowances and raising childcare support is going to people on middle incomes, not those who are struggling the most.
So while substantial amounts of public money have been found to help supporting incomes in the most difficult of times, this will not stem the rising tide of poverty that most analysts are predicting.