NAO: Future rollout of new early years entitlements faces challenges

Government is working quickly to expand childcare entitlements for working parents, but the ambitious timetable was set amid significant uncertainty around feasibility, costs, and benefits, according to a new National Audit Office report.

The Department for Education (DfE) is responsible for the entitlement expansion aimed at increasing labour market participation by helping others¹ to return to work, and greater numbers to increase their working hours.

The Department is on track to meet its April 2024 milestone. As of 17 April, parents had been issued codes to claim their funded places for 246,833 children. Providers have validated 195,355 (79%) of these codes but DfE expects this to rise further and stabilise at around 85% - although the timescale for when this will happen is uncertain².

DfE estimated it needed 7,000 additional places to satisfy demand in April 2024 and it needs approximately 85,000 new places overall by September 2025. The Department acknowledges meeting future milestones will be ‘problematic' given uncertainties regarding the sector's capacity and staffing.

A DfE survey of local authorities in March 2024 found one third (34%) were confident in meeting the September 2024 milestone of 15,500 additional places, reducing to 9% for the September 2025 milestone of a further 69,300 places³. DfE expect confidence levels to increase ahead of the next milestone.

The scheme, which could see 662,000 more children becoming eligible for government-funded early years spaces in 2024-25, was announced as part of the March 2023 Budget. Usual restrictions for budget announcements meant DfE could not consult the early years sector beforehand, and it set timelines without knowing local authorities' or providers' capacity and capability to deliver.

DfE told the NAO it accepted the timetable given the policy imperative to realise labour market benefits quickly. The department originally planned to implement the changes early in some local authorities, to test feasibility and establish evaluation baselines, but cancelled this due to affordability constraints.

The department considered the trade-offs with delivering the programme quickly and accepted the risk that providers may not have enough staff. It worked with HM Treasury to mitigate risk by increasing hourly funding rates for local authorities; by an average of 4.7% for 3–4-year-olds, and from £6.00 to £8.28 per hour for two-year olds.

DfE also changed regulatory requirements, including reducing the staff to child ratio for two-year-olds to 1:5, to help providers flex their staffing models.

Insufficient staffing continues to represent the main barrier to expansion, which is why DfE has launched a national recruitment drive and financial incentives. More than 90% of 152 local authorities responding to DfE's readiness survey in March 2024 cited a lack of early years staff as a problem, with 63% highlighting a lack of staff with appropriate qualifications⁴.

DfE estimates that by September 2025, the early years workforce would need to expand by around 40,000 full-time equivalent staff. This represents a 12% increase on existing staff numbers in just over two years, which is ambitious given the workforce only increased by 5% between 2018 and 2023⁵.

The NAO report highlights the risks of unintended consequences with large numbers of new or less qualified staff entering the workforce, including jeopardising the quality of provision; reducing the number of places available for vulnerable children; and widening the attainment gap between children from more affluent families compared with disadvantaged peers.

DfE estimates the programme will achieve around £5.6 billion of employment-related benefits (a third of total benefits), and a benefit to cost ratio of £1.26: £1. There remain significant uncertainties in how parents of younger children will respond to the new entitlements.⁶

The NAO recommends DfE commits to continuing to monitor the implementation of the new entitlements, so the expansion does not negatively impact or displace those children who may be more challenging or costly to support.

Other recommendations include measuring the impact that interventions, including revised funding rates, have on staff and early years places, to understand how the programme may need to change to achieve the next two milestones and its longer-term outcomes.

Gareth Davies, the head of the NAO, said:  

“Following the Spring Budget 2023, the government quickly established a programme to extend early years entitlements and sensibly staggered its rollout to reduce delivery risks.

“Despite the crucial role providers will play in delivering these reforms, consultation with the sector was hampered by the restrictions that apply when developing budget proposals. DfE then cancelled early testing plans, which exacerbated the significant uncertainty about the sector's capacity and financial sustainability.

“The next phase of the reforms will be significantly more challenging, with little contingency and flexibility in its ambitious timetable. The Department must monitor the programme closely and respond promptly to emerging risks.”

Contact Information

Harriet Jackson
harriet.jackson@nao.org.uk

Notes to editors

On 1 April 2024, DfE extended entitlements to include 15-hours a week for 2-year-olds of eligible working parents; from September 2024, DfE will extend this 15-hour entitlement to children over 9-month-olds; and from September 2025, children over 9-months-old will be entitled to access 30 hours per week.

1. The Office for Budget Responsibility (OBR) estimated by 2027-28, it expects around 60,000 mothers to enter employment and around 1.5 million already in employment to increase their hours by a small amount. Using a different methodology, DfE has estimated that between around 17,000 and 128,000 additional mothers will enter employment and between around 222,000 and 461,000 will increase their hours over the same period between its low and high scenarios. (paragraph 2.4, page 17)
2. Performance data from DfE on 17 April on meeting its milestone for parents able to access new entitlements for 2-year-olds should they find places. 246,833 parents requested codes to claim their funded places,195,355 codes have been validated (79%). This provides DfE the best way to understand additional places secured for children. (paragraph 2.11 and 2.12, page 9)
3. NAO analysis of DfE local authority readiness survey March 2024 shows proportion of local authorities who are confident that there will be sufficient childcare places to meet demand in their area for each entitlement expansion. One third (34%) of local authorities were confident in meeting the September 2024 milestone, with 47% neither confident or unconfident and 19% not confident. (Figure 10, page 29)
4. DfE, representative bodies and local authorities think insufficient staff represents the main barrier to expansion, data from DfE's March 2024 local authority survey. (paragraph 3.12, page 32)
5. In February 2024 DfE estimated that providers would need to recruit around 40,000 additional FTE staff by September 2025 based on parents' registrations for places. This is a 12% increase on numbers from July 2023. (paragraph 3.13, Figure 12, page 32)
6. DfE has identified its current benefit:cost ratio is £1.26: £1 In order to include as up to date a picture as possible we have included figures we have not audited, including this BCR data. More broadly, DfE has relied on feedback from parents of 3- and 4-year-olds in terms of their employment following its 2017 extension for its benefits around mothers entering work or increasing their hours. It has assumed 2% of mothers will enter employment and 26% will increase their hours. There are significant uncertainties in how parents of younger children will respond to the new entitlements. (paragraph 3.17 and Figure 14, page 37)

This report assesses DfE's progress and whether it is well-placed to manage value for money risks. It examines:

• the background to the early years market and government-funded entitlements (Part One);
• DfE's preparations and progress in extending entitlements (Part Two); and
• our view of the future risks DfE needs to manage to achieve value for money (Part Three).

It does not examine government's wider work, which includes wraparound childcare, the Department for Work and Pension's support through Universal Credit, and HM Revenue and Custom's support through its Tax-Free Childcare scheme. Appendix One in the report describes NAO's audit approach and evidence base.