The IFS said that higher than expected inflation means that despite ‘a significant uplift to funding’ for the sector in the spending review, this increase will not compensate providers due to rising costs.
The IFS estimates that childcare providers’ costs are likely to rise by 9 per cent in total between the 2022–23 financial year and 2024–25.
Judged against these rising costs, total funding for the free entitlement for the 15 and 30 hours will be 8 per cent lower in real terms in 2024–25 than it is this year.
The IFS said, ‘A shrinking population of young children means these resources will be spread across fewer people. Even so, our modelling suggests that core funding per hour, which had been set to rise over the Spending Review period, is now likely to be on a downward path in real terms. Under our illustrative scenario, today’s core funding rate of £5.06 an hour for three- and four-year-olds will fall by 14p in real terms by 2024–25.’
The findings are from a new IFS report on government spending on the early years and childcare, funded by the Nuffield Foundation as part of a wider programme of work on education spending.
The report also finds that:
- While inflation is currently squeezing the budget for free childcare hours, real-terms spending on free childcare hours has more than doubled since 2009–10, from around £1.7 billion to more than £4 billion last year (all figures in today’s prices).
- This is in contrast to other stages of education, and many other public services, where budgets have been cut over this period.
- Most, but not all, of this increase in spending has been driven by expansions to the number of childcare hours on offer.
The 2021 Spending Review allocated an extra £500 million over three years to raising free entitlement funding rates.
The report said, ‘But rising costs mean that these cash-terms increases are not as generous as planned. Higher- than-expected inflation has turned what was intended to be a 2 per cent real-terms cut in total funding between 2021–22 and 2024–25 into an 8 per cent cut, and will put core funding per hour on a decisively downward real-terms path following a rise last year. Measured against a price index that more closely reflects providers’ main costs, the funding situation looks even more difficult.’
In conclusion it said, ‘Taken together, these findings suggest that the early years sector will face greater pressure in the coming years. Both the pandemic and the cost-of-living crisis have highlighted the importance of the early years system, but the wider context of tax rises and/or spending cuts across public services will make getting policy right an even trickier task.’
Elaine Drayton, a research Economist at IFS and an author of the report, said, ‘Over the past decade or so, the government has prioritised the early years above other stages of education, rolling out new childcare entitlements for disadvantaged two-year-olds and for three- and four-year-olds in working families. This has meant increasing spending on free childcare hours while other public services have seen cuts.
‘But early years providers are facing rapidly rising costs that are eroding the value of their budgets. Childcare providers’ costs had already been rising faster than economy-wide inflation over the last few years, but they face an even steeper rise in the coming years. That will leave government funding for the free childcare programme much lower than had been intended when the budget was last set in 2021.’
Tax-free childcare and benefit support
The report also highlights changes in spending on support through the in-work benefit system and via tax relief i.e Tax-Free Childcare, which are the only other childcare support available for parents not eligible for the funded entitlements.
In 2009–10, government spending on childcare subsidies through the benefit system stood at £1.8 billion in today’s prices, roughly equalling spending on the free entitlement.
Since then, spending on subsidies through the benefit system has fallen by nearly two-thirds to £640 million in 2021–22.
‘Most of this decline reflects a longer-term trend of falling spending through the benefit system, linked to less generous payments and reduced caseloads,’ the IFS said.
Spending on tax reliefs had been rising, from £510 million in 2009–10 to just over £1 billion the year before the pandemic.
‘But spending fell sharply during the pandemic years and has fallen well short of government plans for spending on the new system of tax-free childcare. It is not wholly clear why families are missing out on support through this new system.’
Josh Hillman, director of Education at the Nuffield Foundation, said, ‘This important report explains the substantial gap between the funding settlements for early years education – which in 2021 looked set to keep resources on an even keel – and a much more difficult reality. Very real cost pressures on childcare providers and families make early years provision for all pre-school children much more precarious.
'The IFS analysis also highlights the long-term squeeze on childcare subsidies through the benefit system, which is the only form of support available to many children in low-income families who aren’t the right age to receive a funded childcare place.’
Commenting Neil Leitch, CEO of the Early Years Alliance, said it was ‘deeply worrying’ that real-terms funding for the ‘so-called “free childcare”’ offers was set to fall by 8 per cent over the next two years.
‘Years of inadequate investment from government has meant that many nurseries, pre-schools and childminders are already teetering on the edge of survival, with 4,000 settings permanently closing in the last year alone,’ he said. ‘As such, it is almost impossible to imagine how the sector will be able to survive with such a significant real-terms funding drop.’
He added that while early years providers were ‘deeply committed…this alone isn’t enough to pay the bills and keep the doors open. The fact is that the early years funding system in this country is broken and the way in which the government views and treats our vital sector needs an urgent rethink before it completely implodes.
‘Rather than continuing to push ahead with ill-thought-out deregulation plans, it is vital that ministers put forward a long-term plan for the sector that includes adequate, realistic funding.’
National Day Nurseries Association's chief executive Purnima Tanuku said that early years must be made a priority 'if the Government is serious about their levelling-up agenda.'
Liz Bayram, chief executive of PACEY, urged the Government to ‘stop tinkering with proposals for regulation chance and address the years of underfunding that has left the sector in its current crisis.’
Kevin Courtney, joint general secretary of the National Education Union, said, 'The findings from the IFS report published today will sadly come as no surprise to early years professionals and our members in Maintained Nursery Schools (MNS).
'The only way MNS and other providers in the sector will be able to manage is to make further cuts. However, our members are telling us that this is no longer an option as they have already made cuts to services and staff to stay open. There is nothing left to cut. Unless the government intervenes and announces more financial support for the sector in next week’s budget, it is our belief that further closures are inevitable.'
Bridget Phillipson MP, Labour's shadow education secretary, said, 'The IFS's findings simply reinforce the need for the new, modern childcare system that Labour will build in Government.
'The falling value of childcare support means parents will face even higher bills or more nursery closure, all because the Conservatives crashed the economy.
'Labour will offer breakfast clubs for every primary school child in England and enable councils to open new maintained nurseries, as the first step on the road to a new modern childcare system.'
A Government spokesperson said, 'We understand global inflationary pressures are squeezing household finances and people are worried about covering the basics.
'We are committed to improving parents’ access to affordable, flexible childcare and are currently exploring a wide range of options to do this.
'We have also already increased funding to local authorities to increase the hourly rates they pay to childcare providers, and we’re providing further support for early years providers with their energy costs.'
- Download the report here https://ifs.org.uk/publications/early-years-spending-update-impact-inflation