Childcare costs more in tax than childcare!

I’m interested in whether anyone else thinks this is strange. Let’s consider a professional woman (or man, but this happens more to women), we’ll call her Sarah, who decides she wants to continue her career after having children and work five days a week. Sometimes she’ll have to leave early, come home late and so on, so she is likely to need serious childcare support. The option that most seem to go for in these circumstances is a nanny. Not cheap, but if you have two children it is not that much more than nursery plus attendant pieces, and significantly more reliable. Suppose Sarah is earning £75,000 per year. Respectable, but may go up in many professions as she gains in seniority if she stays working. So, my question is, how much money does she end up with per year, how much goes to the nanny and how much to the tax man?

The answer is as follows:

  • Nanny                   £26,000
  • Tax man               £36,941
  • Sarah                     £12,059
  • Total                      £75,000

Does it make economic sense to make it so difficult for professional women to continue their careers after having children? I’m sure that lots of people will tell me that there are cheaper childcare options – there are, but most can’t cope with the demands of a professional career. If we wonder what keeps women out of many of the “top jobs”, maybe the breakdown above is part of the answer.

Background analysis

  • Nanny wage taken as £10 per hour net, thus £500 per week for 8.00am – 6.00pm, which is fairly standard. Thus Nanny total is £500 x 52 = £26,000
  • Employer and employee taxes on top of the Nanny wage are £235 per week = £12,220 per year.
  • Thus £38,220 total cost of nanny needs to be paid from net earnings of £50,279 (taken from one of the net pay estimating websites), leaving Sarah with £12,059.

Politicos vs bean counters – differing perspectives to cutting costs

A twitter response from Tom Gash (@TGCrime) at the Institute for Government to my last missive got me thinking further about how government allocates resources and perhaps more importantly how government reallocates resources when it is trying to reduce costs and cut back services.

Tom is a thoughtful man, particularly interesting on Criminal Justice. His response to my last blog on using PbR to assess the appropriate allocation of resources between probation/rehabilitation, and prison was “Thanks for this – agree migration strategy essential. You’d forgive HMT for not wanting to gamble on this right now…”.

My first reaction of course was actually no I wouldn’t forgive HMT for not wanting to gamble on this right now. If we are to reduce the costs of government we need to reshape it, and using outcome approaches can give you a low risk way of testing the reshaping of services and changing your resource allocation, without having to dual run prevention and acute services and run the risk of over spend.

I realised on reflection that this misses the point. From HMT’s perspective the normal solution to cutting costs is simply to stop doing stuff. Remove it from the budget and it ceases to be. While there are arguments that such reductions build up cost pressures for the future, they may be un-evidenced and the impact not easily forecast, so may come across as special pleading. This is obviously rather more politically troubling than reshaping services, but it is lower risk from a simple management of inputs perspective. It appears reasonably reliable and you don’t have to spend time doing due diligence on a reshaped model that someone is convincing you will save you lots of money if you only invest now (in fact the old “invest to save” argument has been so often used, so often not saving at all, that one would forgive Treasury for a degree of cynicism).

For politicos the situation is reversed. Simply cutting services is uncomfortable and unpopular. It is therefore a time for buck passing (for example giving local authorities more freedom, aka responsibility, at the same time as cutting their budgets), disparaging the receivers of the service or benefit to be cut, or trying to do it as quietly as possible. Reshaping services behind some grand vision on the other hand is much more interesting.

What are the implications of all this?

–       The first and most obvious is that large scale reshaping is therefore extremely difficult and requires huge political capital. So those areas that don’t get that political investment may end up with standard cost cutting as a default.

–       Second, where wider service reform is brought forward, the bean counters may seek cost cutting at the same time, as part of the deal. For example, the drugs PbR pilots or the present probation work. My suspicion is that this will lead to risk averse behaviour and may not lead to the level of innovation that we’d hoped for.

–       Third, supporting service areas in building their financial arguments around reshaping services would appear to be a useful contribution, as are outcomes based contracts, but as we’ve already seen, these may not be enough.

Is Chris Grayling missing the revolution?

Chris Grayling yesterday published his consultation on reforming probation, focusing more on rehabilitation and bringing in the private sector. This is double edged for us. It directly builds on our work in Peterborough, but does so very early and before there has been wide testing of PbR in criminal justice. He does on the other hand have a limited political window before the next election and it has put rehabilitation firmly on the political agenda.There is also at least some money available for short sentence offenders which is a break through. Probation is cross, understandably, and most others aren’t commenting in public as the detail isn’t out and they may be bidding. So far so good.
The story bombed out pretty quickly, but you can read about it here. Social Finance issued the statement here.
The issue that I’m interested in is what we alluded to in the paragraph:
“We encourage the Secretary of State for Justice to look beyond the Probation budget to finance this work. The criminal justice system costs the taxpayer £6.3 billion a year. At present we spend 13p in the pound on probation and rehabilitation, and 87p in the pound on locking people up. With more resources, better rehabilitation could cut crime andreduce wider criminal justice costs. The allocation of resources between these two areas should therefore be part of this consultation. This is possible as any new money would be paid on a results only basis. Without adequate resources, it will be difficult to ensure that support for rehabilitation is delivered properly and at scale.”
The probation budget of course overstates the amount going to rehabilitation, as probation does a lot of work around public safety, managing community sentences, advising the court and so on. So I think it is safe to assume 90-95p in the pound goes on processing and punishment and 5-10p max goes into rehabilitation. Now many might argue that is the role of the justice department. The clue, as they say, is in the title. It ain’t the fluffy put people back together department, it is the Ministry of Justice. I can see their point, but effective rehabilitation is in the Ministry’s interests. It cuts crime and should reduce their costs.
So my question is, why is even a discussion of the allocation of resources between punishment and rehabilitation unlikely to be on the agenda, and what can we do about it?
First let’s look at how it could be done.
Payment by results is being used in two different ways at the moment. One way, like the work programme in the UK, is to try to improve the efficiency/effectiveness of a present service area that is perceived to be providing poor results. This is done at scale and typically ratchets up the outcome focus over time, so that providers have time to improve or get taken over if they can’t sort themselves out.
The other way, like the Peterborough SIB, is to try innovation. Government would not pay for the service under normal circumstances, as it is perceived as too risky. But if you only ask them to pay for the outcomes achieved, then with a bit of luck, you can develop a contract and test out a service in a rigorous way and with the government’s blessing.
There is a potential third way(!). Outcome based models can be used to test the appropriate allocation of resources between a preventative spend and an acute one. So an outcome based contract is set up for the preventative spend. It doesn’t have to be entirely outcomes based, in fact it is probably better if it isn’t, but any spend over and above expected preventative spend would need to be on an outcomes basis, as it would be being taken from the potential spending on the acute service. In other words the additional preventative money would only be available if it had successfully shrunk demand for the acute services.
This method is potentially the most radical, as it allows service effectiveness to decide on budget allocation, an unusually rational way of doing things.
So why is this not being done? In all the conversations we have had with government insetting up SIBs of all shapes and sizes, they always have an expectation of an outcomes cap. The fear of excessive success is often significant. To my mind the reasons are as follows:
  • supply in-elasticity  for a lot of acute services, there are high fixed costs and demand has to reduce significantly before supply can be taken out of the system, before a prison can close for example.
  • backfill: many acute services are perceived to have infinite demand in comparison to supply (mental health for example), so any reduction in demand will simply be filled by other people. Or spare capacity will impact on behaviours elsewhere in the system. Judges will sentence more people to prison if prisons aren’t full, social workers might put more children into care if there are places available etc.
  • fear of poor contracting: the concern that they will somehow get legged over in the contract and suppliers will succeed in getting paid without having the wider outcomes impact that would actually reduce acute service demand.
So what can be done about this? All the problems described above are soluble over time.For example, outcome caps can be put in place, but any supplier hitting them has the cap and outcome values raised after a time delay of say a year. This would allow time for supply reduction strategies to be put in place and to ensure that backfill is managed. The detail issue would be managing whether such raises to the cap would be automatic or at the government contract holder’s discretion. The former ensures pressure is maintained in the system to implement supply reduction strategies – a pressure that is typically needed as reducing service levels is hard and unpopular with stakeholders. The latter reduces the risk if the contract was poorly formed in the first place and suppliers are reaching caps but not impacting actual demand.
I’m not sure this is sufficient unfortunately. To do this also requires different accounting rules and ways of managing public expenditure. I’m not an expert, but I imagine a department wanting to retain flexibility between two significant budget line items is not the sort of thing the Treasury likes. I do know that DWP had a significant fight on its hands when it sought to do the DEL/AME switch but succeeded eventually. I’m not sure what the response would be when looking at two departmental budgets as would be the case in Justice.

Where I am sure that Treasury would agree is that a supply reduction strategy needs to be in place alongside any demand reduction if we are to make any real difference to long term numbers and cost.

When faced with Gordian knots such as this, our experience is that a migration path is needed that allows the government to take initial steps without taking on too much risk. In this instance that is about pushing to ensure at least some of the contracts allow for either quite high levels of performance before being capped, or for the caps to be expanded. It is also vital that a range of actors engage with this debate and make relevant contributions to the consultation process.

Please get in touch if you have thoughts, feedback or want to participate in this debate.