Jeremy Hunt’s Parent Trap: Why young City parents are better off earning £99k than £135k
Some 55,000 parents will miss out on Chancellor Jeremy Hunt’s expanded package of childcare support due to earning more than £100,000, new research out today shows.
Number crunchers at the research firm the Centre for Economics and Business Research (CEBR) reckon 71 per cent more working parents over the next five years will be incentivised to trim their working hours to stay below the threshold at which childcare subsidies are pulled.
Hunt ramped up state support for working parents at his budget by extending the 30 hours of free childcare to families with kids aged between nine months and five years.
This support is removed when one parent earns over £100,000. Individuals also start to lose their personal £12,570 tax-free allowance at this level, pushing up their marginal tax rate – how much the government takes of each additional pound earned – to around 60 per cent.
The 55,000 working parents will have childcare support cut off due to them receiving pay rises which pushes them above the frozen £100,000, a process known as fiscal drag.
The sudden end of state backed cash means that a parent with two small children will be worse off if they are earning £134,500 than if they were earning £99,000, according to the Institute for Fiscal Studies.
The move, alongside other supply-side measures at the budget, could boost labour supply by 15,000 workers, lifting long-term GDP by 0.2 per cent, the biggest growth injection of any single government policy since the Office for Budget Responsibility started examining spending and tax decisions in 2010.
Critics have noted that the combined package of supply-side measures means Hunt is spending around £80,000 on each additional worker that will stay in the workforce as a result of his first budget.
Britain has been gripped by a sharp rise in economic inactivity – when someone is out of the job and not looking for one – since the start of the Covid-19 crisis. Most of its peers have seen labour participation rise over the same period.
A Treasury spokesperson told Morning Wire: “We’re making the single biggest investment in childcare ever, expanding free hours to all eligible working parents with children over nine months.”
“The threshold for entitlement allows us to support the vast majority of families, and those who need it most, whilst ensuring sustainable public finances at a time when we’re focused on our promises to halve inflation and reduce debt.”