Understanding the link between childcare costs, poverty and disposable income

Parents of children under 5 in Scotland are generally happy with the quality of their early years childcare, and 9 in 10 think there should be more funded childcare. But at the moment, childcare costs are prohibitive, with 8 in 10 parents saying that the high cost of childcare is a downside.

Reducing costs is a priority for parents, but how can expanding the current offer help low-income families and release parents from poverty?

In our report we outline an example offer that is based on the number of hours of early years childcare that parents told us they want. We will use this again here to illustrate how more funded childcare could support low-income families. The example offer is:

• 25 hours for 1 and 2 year olds
• 35 hours for 3 and 4 year olds.

Saving money

We can illustrate the impact that increasing funded early years childcare can have on low-income families by looking at an example family. 

The family is a couple with 2 young children who are aged 1 and 2, with 1 parent working full-time and the other part-time on the National Living Wage (NLW). 

In the current system, after housing costs, they have £611 per week remaining (£153 over the poverty line) but their childcare costs £336 per week, leaving them with just £275 per week to pay all their bills and cover essentials. 

If this same family had the example early years childcare offer, they would have more than double the disposable income that they have with the current offer. This is because all their childcare costs would now be covered, saving them £336. 

Increasing early years childcare to the example offer would have a massive impact to this family’s household budget, helping them to make ends meet and ultimately be more financially secure.

While this family have significantly higher disposable income with the example offer, their total household income has not changed. This means that the family are not any further over the poverty line than they previously were.

Earning more

However, with the example offer, the second parent might decide to move into full-time work and pay for the additional childcare costs that are over and above the example offer. If both parents are in full-time work at the NLW, their total household income after housing costs increases to £661 per week, lifting them further over the poverty line (£204 above the poverty line). 

However, with the additional childcare costs that they pay for their childcare needs that are over and above the example offer, their disposable income falls to £437 per week. In the example offer this is less than their disposable income if the second parent remained in part-time work.

This will not be the case for many families where moving both parents into full-time work continues to increase their disposable income after childcare costs, but it does highlight the complex decisions that parents need to make when deciding how much childcare to use and how much work to do.

When can childcare lift a family out of poverty?

In our analysis we show that most families with a child under 5, in poverty, have at least 1 parent not in work (68%). These families are more likely to see bigger changes to their income by moving into work. For a couple not in work, taking up a funded early years offer and moving into employment could sufficiently increase their income and lift them out of poverty.

However, many families in poverty will remain disadvantaged within the system. For example, single parents can only ever earn a single wage which will inevitably be less than a couple in similar employment. The same might be the case for a family where one parent is disabled and cannot work, noting that many disabled people face additional costs which will eat further into their disposable incomes.

The problem at a bigger scale

While the example family illustrates some of the challenges with measuring the impact of expanded funded childcare on low-income families, this has larger implications for understanding how funded early years childcare can reduce child poverty in Scotland.

Our modelling suggests that introducing the example offer will only reduce child poverty by around 2.9 percentage points by 2030, even if we reduced the gender pay gap for parents of children under 5, and people moved into work that is paid above the real Living Wage. 

This is for 3 reasons:

• Childcare costs are not taken into account when calculating the poverty rate, even if this is where parents will feel the impact of more funded early years childcare.
• For some families, the increase in work will still leave them below the poverty line – this is particularly the case if we move parents into low-paid work and where only one parent is in work, for example, single parent families or parents who are disabled (see NLW scenario).
• Many families with a child under 5 already have all their parents in work (60% of families) so they are less likely to increase their work hours and pay enough to earn sufficient levels to lift them over the poverty line. Although, with an expanded childcare offer, they are likely to save significant sums on childcare, increasing their disposable income.

What does this mean?

The Scottish Government should target funded early years childcare to lift families out of poverty and help low-income families to make ends meet. They must utilise all the poverty reduction potential that an expanded childcare offer can bring, particularly through linking with other anti-poverty policies such as parental employability schemes. Yet it is critical that we also understand the wider impacts of a childcare expansion that go beyond the measures of poverty used for the Scottish Child Poverty Targets, such as expanding low-income families’ disposable incomes as well as the other missions of childcare in Scotland, including poverty prevention (closing the attainment gap) and family wellbeing.