Rachel Reeves incoherent response on the £100k childcare cliff edge issue

[MidnightPatrol]

Mumsnet have interviewed Rachel Reeves about various topics, and one of those questions put to her was about the £100k childcare cut off (asked by me).

Her response is completely incoherent - shared below for the many others stuck in this ridiculous situation (or interested in it).

Transcript:
Justine Roberts: Okay, so we've had quite a lot of questions around the tax system which is obviously your specialist subject. Here's a typical one. MidnightPatrol said: I have a one and four year old in nursery. As I earn over £100,000, I lose £25,000 in childcare support for them. I need to earn an extra £55,000 over that £100,000 cutoff to cover that loss. Where I live in London every other parent I know is either working part-time or salary sacrificing tens of thousands into their pensions to try and avoid this. Is there any suggestion that this absurd cliff edge might be changed?

Rachel Reeves: So again, this is not a cliff edge that I introduced, but is one that I inherited and I do understand what is being said there about if you've particularly got young children that you miss out on some of these key supports. Now obviously, the childcare offer is quite a new offer and it's the first time that it's been properly funded. We've put the funding into it. It is much more popular than anyone anticipated. It's actually costing taxpayers more than we originally thought. But that's a good thing because it is helping more people into work. I think it is right that it isn't available to the highest earners. If you are earning more than £100,000, you are within the top 5% of earners in the country. And I don't think you could have a system where everybody has all of their childcare costs paid because that would require even higher taxes on people to be able to afford that.

Justine Roberts: But do you acknowledge the cliff edge?

Rachel Reeves: I absolutely recognise the cliff edge and we are looking at how we can always ensure that the tax system incentivises people to work. But I think most people recognise, especially if you are in your thirties and forties and at sort of maximum earning power, that although you may lose some benefits in the short run by taking that promotion or taking those extra hours, actually you are going to progress whereby you are no longer losing out because you are earning so much more. And you know, we should celebrate people doing well and being in those very top income brackets. But I think it is right that if you are earning so much more than the national average, you should pay a bit more tax.

Well between 100k and 125k you also lose your personal allowance so you pay an effective rate of 60% already on income at that level + the loss of 30 hours. Then also factor in student loans which many people are still repaying!

Anyone around that level will go part time or increase pension contributions. It's only when you get much higher you may choose not to bother as unavoidable.

Minimum wage is 26k now and the living wage in London is over 30k. Thats just quite a narrow gap between 'low' and 'high' earners.

High earners stop earning as there's little point (due to above); bringing down the 'top' earners so many sit under 100k. Meanwhile tonnes of unemployment because the cost of having an additional employee is so high.

More tax needed to fund all the people on UC unable to get jobs.

We are really in a downward spiral right now and sadly labour haven't helped things.

Exactly. Op talking about ‘salary sacrificing’ because her high-earner friends went part-time doesn’t show an understanding of the very real situation for many mums where your full salary is so low that is completely swallowed by childcare costs.

Agree re lowering the threshold.

And what about all the women married to £100k earners in more ordinarily paid jobs who are now excluded from childcare support?

It is a disincentive to work if your wages are swallowed up by childcare, as you say. Nursery places in my area are getting on for £2.5k a month now - £100k after tax and student loan doesn’t clear £5k a month, so two in nursery could take up your entire wage.

I’m not actually averse to paying high taxes, I am averse to paying high taxes and then being excluded from using the services funded by those taxes - and being expected to fund them privately myself instead.

You're disregarding the "value" in sacrificing large amounts into pensions and saying it's equivalent to earning c£50k - clearly it's not equivalent as you have the pension assets for support in retirement that someone on £50k doesn't and you have the career progression beyond nursery years of someone on £100k+ in their 30/40s compared to that of someone on £50k. Similarly with the voluntary reduction to hours, you have the "benefit" of spending that time with the child/ren vs working full time for £50k.

Don't get me wrong, I understand the pain of the clidf edge and would welcome a more staggered approach, but I do think that higher earners don't need as much state subsidy for childcare as lower and middle earners do.

I understand entirely the issue of people’s salaries being so low they can’t afford childcare at all - but, that is not the issue being discussed.

Agree it's incoherent because she doesn't address the fact that a cliff edge is terrible policy. She just witters on about high earners while ignoring the cliff edge. It's completely legitimate to say that high earners shouldn't get it but ridiculous to say that a cliff edge like this is a good idea. It creates all sorts of behaviours that the government actually don't want to encourage (like working less, turning down promotions etc).

Who is subsidising whom in the tax system is a red herring.

Monetarily, investment bankers subsidise nurses. However, if the number of nurses were cut by 20% people would start dying. If the number of investment bankers were cut by 20%, no one would notice and society might even be the better for it. Earning a lot is not a moral virtue, it is just the weird way our (crony) capitalist system pays people.

What is true, though, is the cliff edges are a disaster in tax systems. It should always be worthwhile financially to earn more.

If we don’t have extra money, we could easily start withdrawing nursery funding at £75k and then fully withdraw it and £125k (for example). However, it should always be worthwhile to get a pay rise.

I don’t think it’s a good incentive for people that they can maybe have that money in… 20 or 30 years? What will pension policy be by then? Will there be a tax free portion? Will there he a capped amount?

Furthermore - the next issue in 15 years will be all the high earners deciding to take early retirement as they have stockpiled huge pensions to claim childcare help.

And - if you effectively ‘cap’ earnings at £100k for parents with young kids, that does have knock on effects. And also - what is the purpose of doing this? There is none, it’s just occurred as a result of the policy and no one can justify it.

£100k after tax, NI, auto-enrolment and student loan is less than £5k a month. Thats two nursery places in London now.

What Reeves and others fail to see is that it can cost parents of young children more than they are getting in additional salary if they go over £100k and use childcare.

That means they either pay more into their pension (the logical financial choice, which brings in zero tax over £100k and gets them free childcare plus a nice pension for later in life) or reduce their hours to come under £100k (which gets them more time with their kids, brings in zero tax over £100k and gets them free childcare). There is no world in which this can be justified on the basis that “lower earners” shouldn’t subsidise higher ones, when lower earners are net beneficiaries not net contributors, it is fiscal lunacy.

I’ve never been affected by this (I’m now a high earner but my kids are older), so it would actually be MY taxes that were subsidising other high earning parents. I’m very happy to do so - some benefits should be universal, and this is one of them. Claw the cost back by making all high earners pay more tax, if that’s what’s needed, but don’t punish parents in a way that distorts their behaviour.

That would be much better than the present system.

She’s right that tax will always need to be raised somehow.

The problem is the disincentive it creates, and the treating of people in almost identical positions wildly differently.

A two bedroom flat in an ok bit of London = mortgage of c£2,300 pm. Plus childcare and then that’s an entire £100k salary gone. People say that high earners should move out of London etc etc - God forbid that someone working like a dog who wasn’t blessed with inherited housing equity should want to live and raise a child in the city they work in!!!

I'm with you OP - it's such a temporary benefit with long term impact if it was extended to that last group. £100k doesn't go as far as people think anymore. It's not a woe is me, either. It should be based on the sum of the income of the two parents and affordability, with a taper system. Given you can currently have a household income of £198k and get the benefit, or a household income of £100k, the system today is not fairly distributed.

1. The cliff edge needs to be fairer
2. They should consider a system where payments can be distributed over more years where there's not such a huge immediate impact. I'm not saying universally tax everyone more, but maybe an interest free childcare loan that spreads the cost above free hours over a longer period - perhaps up to the age the child finishes primary school.

I think her response is fine.
Have to say i agree with not funding it for high earners.
My eldest is only 14 and only had 15h term time from 3 and as summer born that was literally sept to jul age 3.
Then came more funded hours 30h if people were working and the ages changed i think.
i was earning about £100 a day pre tax and a really crap nursery was about £54.
i didnt end up going back - because they were crap and because dc1 was sen.
I dont think its a cliff edge because on 100k you have to pay pension anyway so.. and many would choose to out even more in pension.
Also you have a 4yo so theyre presumably getting at least the 15h free? But anyway you have only 6m more of funding that child. The most time anyone is paying is 4 years with summer borns only paying age 1-3.

High earners are getting like 40% tax added back to their pension and you can add say 60k(?) to a pension a year.

If i went back 3 days a week i was going to make 3k a year out of 24k.
Anyway nursery costs like care homes are only so expensive because gov is funding and because some people earn so much.

Overall a bigger problem imo is taxing the middle/low earners so high to pay for those not working.
They may seem to pay less tax but are still paying full school lunches and trips etc.
Its about £500 a child per year for school lunches
Some year school trips are also that much.
My kids school bus for secondary is almost £1k
Swimming lessons 300 a year per child.
Breakfast and afterschool clubs were so expensive too.

The free breakfast clubs talked about didnt seem to materialise.

if you put 40k into pension you get the tax added of i think 16k?
But if you do that for say 10y 160k or 20 320k someone earning only 15k would have a lot less tax added back and much smaller pension pot. Of which 1/4 comes out tax free so

It reads coherently to me. As coherently as anything written as reported speech/ a directly transcribed interview ever does anyway.

yes exactly

This.

If you want to frame the issue around need, there's more than just one person whose needs might be relevant here. I'm not sure everyone on this thread has realised that some NHS staff don't have the same freedom to put the whole amount into their pension so may just work less instead. Meanwhile, those who need the care they'd provide are fucked over, and society as a whole gets a lower tax take. We need those people working!

I don't blame Rachel Reeve for this idiot system existing in the first place. That's down to the Tories, and only them. But it's the choice of the current administration to leave in place a system that allows a dual earner household of £199,998 per year to receive the free hours if distributed right, but refuses them to a single parent on 50.1% of that.

There is a difference between financial management - increasing pension payments, going part time, taking early retirement - and using the tax system to increase personal wealth - and relying on benefits to fund essential costs due to low wages and high costs of living.

Taxation is based on earnings. Across a lifetime it will mean that sometimes you pay in more or less than you get out, maybe you will always pay in more than you get out, maybe you will always pay in less than you get out. The greatest beneficiaries are children and elderly as a matter of course given the cost of education, health and welfare and then there are unforeseen events like illness and disability, redundancy, death, divorce etc which throw a spanner in the best laid plans.

Benefit payments are a safety net to survive or help you get out of a shit situation. They are not there to aid financial planning to increase personal wealth regardless of how much tax you pay.

If you had an extra £10k tax allowance per child, would that help?

Haven't MP's just voted to increase their pay to £99,999.99 - sorry to £98599, give it a year until their next pay rise and I bet the cliff edge disappears.

It is a real challenge to the idea of the ‘cradle to grave’ state to start excluding higher earners (and those paying the greatest share of tax) from the services they fund.

But high earners aren't being excluded from a state-provided childcare system. They are not getting a government payment towards using a private-provided childcare system.

You’ve misunderstood the issue with the cliff edge.

Do you really think it’s a priority that people on £99k should get the full credits? Or do you think tapering it down for high income people is something they could live with? Or, alternatively, just make it available to everyone: it’s only 3% who are affected, and it’s creating a disincentive to earn (and pay the tax) that funds our services.

No difference really, semantics.

We all use the same nurseries - 97% of parents can claim a significant subsidy towards that, only 3% are excluded.

Not semantics, no.

The state education system is set up and run by the state. Ditto the national health service. Thus access to these is independent of income etc. The state pension is also accessibly to all who have paid sufficient NI, regardless of other income.

Care homes, like nurseries, are owned and run by private organisations and whether or not a person has a state payment for residing in these homes is asset dependent.

(I do agree with you that cliff edges in the system are bad and would ideally be tapered)

No, I haven't misunderstood, I just agreed with the poster quoted that in the scheme of all the other things that are vastly underfunded I think this is unimportant. Is it "fair" - not entirely, but lots of things aren't fair, like families where one parent has to stop working entirely to care for a complex and/ or behaviourally challenging disabled child and is compensated with a miniscule fraction of the wage they've had no choice about giving up.

Lots of things are unfair, and some are a lot more unfair than having to pay for your own child's nursery when you earn 100k.

I think that if there were to be a taper, it would probably do something like start at £80k and be fully gone by £100k so wouldn’t necessarily improve things for OP!