Real terms funding for 'free' childcare hours plunges by 8%, IFS warns

Early years providers are facing rapidly rising costs. Credit: PA

Early years funding is likely to fall in real terms by 8% to 2024, according to the Institute for Fiscal Studies.

In a new report, the think tank warns that while the early years budget is due to rise in the coming years to £3.75 billion a year, that increase will be partially wiped out by soaring inflation.

The funding, which covers the 15 hours entitlement to early education and childcare for all three and four-year-olds – as well as 30 hours for the children of working parents, will likely be squeezed as childcare providers’ costs also rise.

The study, which was funded by the Nuffield Foundation, found that the rising costs for childcare providers will mean that the total funding for the free entitlement will shrink by 8% by 2024–25 compared to 2021–22.

The IFS notes that even with a diminishing population of young children, core funding per hour is likely to be on a “downward path” in real terms.

Elaine Drayton, who authored 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 she warned that the costs facing childcare and early years providers have “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,” she said.

“Very real cost pressures on childcare providers and families make early years provision for all pre-school children much more precarious,” said Josh Hillman, director of education at the Nuffield Foundation.

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Elsewhere, the report also found that while inflation has put pressure on the budget for free childcare hours, real-term spending on free childcare hours has more than doubled since 2009 – rising from £1.7 billion to more than £4 billion last year.

That sits in contrast to other areas of education, which have faced cuts.

Researchers also found that government spending on childcare subsidies through the benefits system has fallen to around £640 million, a decline that reflects “a longer-term trend of falling spending through the benefit system, linked to less generous payments and reduced caseloads”.

The findings come as government departments and the public sector are braced for another round of belt-tightening ahead of the Chancellor’s Autumn Statement on November 17.

Early Years Alliance chief executive Neil Leitch said: “While the news that early years funding is failing to keep up with inflation will come as little surprise to anyone in the sector, the news that real-terms funding for the so-called ‘free childcare’ offers is set to fall by 8% over the next two years is still deeply worrying.

“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. As such, it is almost impossible to imagine how the sector will be able to survive with such a significant real-terms funding drop.

“We know that early years providers are deeply committed to providing high-quality education to our youngest children, as well as the childcare that many parents rely on – but 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. This is, quite simply, the only way to ensures that early years settings can remain viable not just now, but in the years to come.”

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.”