UK chancellor Jeremy Hunt’s policies to boost the workforce will cost £70,000 for each person who enters employment, the Institute for Fiscal Studies think-tank said on Thursday.
The main reason for the high cost is that the government’s £5bn expansion of free childcare to children under three years old will mostly benefit parents who are already working, according to the IFS.
But because families where one parent earns more than £100,000 a year will not qualify for the new 30-hour entitlement, the policy will also deal a “huge hit” to work incentives for high earners, the think-tank said.
Economists have largely welcomed the chancellor’s efforts to bring more people into work by increasing support for childcare, making changes to the benefits system and helping those with health conditions.
But the IFS analysis shows that this policy package will have a high price tag for relatively limited gains — while creating some perverse effects.
In particular, anyone with a child below school age earning between £100,000 and £134,500 would be better off if they kept their taxable income below £100,000 in order to qualify for the childcare offer.
Robert Joyce, IFS deputy director, said that taking this alongside a similar cliff edge in eligibility for child benefit when a parent’s salary reached £50,000, the government was making “an absolute pig’s breakfast” of the tax and transfer system for higher earning households.
The expansion of state-funded childcare will still have a bigger effect on employment than any other policy: the Office for Budget Responsibility fiscal watchdog estimated it will lead 60,000 people to enter work and about 1.5mn to work longer hours — potentially boosting their long-term earnings.
But the IFS said this meant spending on the policy would double while only a sixth of the places funded would be new. Most of the money would go to parents who were previously paying for childcare.
Another measure — the big tax giveaway for high earners saving into pensions — looks even more expensive given its uncertain contribution to the workforce. If the OBR’s central forecast proves correct, it will boost employment by just 15,000 — at a cost of £100,000 per job.
The OBR thinks other measures to get people back to work — including upfront payment of childcare support for low income parents, intensive employment support for disabled people and a tougher regime for parents and carers claiming out of work benefits — will have a smaller effect on employment but they also come at a much lower cost per person, ranging from roughly £2,000 to £20,000.
Its forecasts suggest the overall package will raise employment by 110,000 by 2027-28 at a cost of about £7bn a year — nearly £70,000 for each job.
Paul Johnson, IFS director, said this gain would be “just a fraction of the number lost from the workforce in the last couple of years” and would be dwarfed by annual net migration.
But Tony Wilson, director of the Institute for Employment Studies think-tank, said spending on childcare could be justified by the wider benefits to society, parents and children’s development — while £10,000 to £20,000 was “well worth paying” to help disadvantaged people into work and cut inequality.
Intensive support for disabled people to enter work could boost employment by about 10,000, the OBR said.
This would be separate from any effects of a bigger shake-up of disability benefits, which will remove any link between people’s ability to work and their eligibility for benefits. This is meant to give disabled people confidence that they can take a job without risking the loss of vital income.