Simulating employment and fiscal effects of public investment in high-quality universal childcare in the UK

Abstract

This paper simulates the likely fiscal and employment effects of a vast public annual investment programme of free universal high-quality early childhood education and care (ECEC) services in the UK. It examines the extent to which it would pay for itself fiscally for different scenarios of pay increases. Investing in high-quality universal ECEC benefits all children by improving their life chances, especially for those living in lower income families. It also generates larger employment effects than other more typical investment policies such as construction projects and fosters gender equality in employment: not only it provides many high-quality jobs for women, it also allows many mothers to improve their lifetime earnings prospects by freeing up their childcare constraints. This in turn has beneficial fiscal revenue effects for the government. Estimations of annual public expenditure for a system of highly qualified and well-paid childcare staff with low child-to-staff ratios are performed, with universal coverage for all pre-school children aged 6 months to 4.5 years. Labour demand and matching supply effects are also simulated using input–output methods, for different take-up rates of the programme. A microsimulation tool is used to calculate increases in household income and tax liabilities and decreases in social security benefits spending. This results in a net annual funding requirement of between 28 and 39% of the gross investment. Two funding methods are then explored: raising taxation in a progressive way and recouping the cost over time from persistent mothers’ increased earnings. The former would entail a net additional contribution by the richest 20% of households of at most 0.4% of their income; the latter would require 21 to 31 years to offset the programme on average, which is within a typical working life-course following a first child’s birth, of 35 years.