The early years sector in England received a significant
uplift to its budget at the last Spending Review in
2021, bringing total annual spending from £3.6 billion in 2021–22
to about £3.75 billion a year (in cash terms) between 2022–23 and
2024–25. This covers spending on the entitlement to 15 hours of
early education and childcare for all 3- and 4-year-olds and some
2-year-olds, and 30 hours for 3- and 4-year-old children of
working parents.
But higher-than-expected inflation means even that
increase will not compensate for rising costs. We
estimate that childcare providers’ costs are likely to
rise by 9% in total between this year (2022–23) and
2024–25. Judged against these rising costs, total
funding for the free entitlement will be 8% lower in real terms
in 2024–25 than it is this year.
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 3- and
4-year-olds will fall by 14p in real terms by 2024–25.
These are among the findings of 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.
In addition to the free entitlement, families can also receive
support for childcare through the in-work benefit system and via
tax relief, which are the only forms of support available for
children not covered by the free entitlement. The report shows
that there have been dramatic changes in spending on these other
forms of childcare support:
- 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.
-
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.
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 2-year-olds and for 3- and 4-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.’
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.’
ENDS
Notes to Editor
'Early years spending update: The impact of inflation' is an IFS
report by Elaine Drayton and Christine Farquharson.
