Childcare funding rates largely protected in real terms - with a big uplift for disadvantage premium

The government yesterday announced a £2-billion injection of funding into England’s early years system. The vast majority of this increase is in line with plans set out at the March 2023 Budget, to fund the continued rollout of new childcare entitlements for working families with children under 3. This is topped up with a £75-million expansion grant to support new childcare places in areas where demand is projected to rise most quickly.

What is new is information on how this additional spending will be distributed: between core funding rates (and age groups within that), the Early Years Pupil Premium (which offers an uplift for disadvantaged 3- and 4-year-olds), and the much smaller £75-million expansion grant.

Core funding rates protected in real terms

Yesterday’s announcement confirmed small increases in next year’s funding rates, which will largely offset the impact of economy-wide inflation (as measured by the GDP deflator). This rise will not, however, compensate childcare providers for the bigger rises in costs that they will experience over the next year as the minimum wage and employer National Insurance contributions increase. The latter will particularly affect larger settings, which will benefit less from the increase in Employment Allowance offsetting their NICs bills.

The uplift for 3- and 4-year-olds is slightly higher, meaning that effective funding rates will rise about 1% faster than economy-wide inflation. This will leave real-terms core funding for 3- and 4-year-olds at its highest level since 2017. But, when compared to provider costs, effective funding remains around 40p an hour below its 2017 level.

Figure 1. Core funding rates for the free entitlement

Note: Real-terms prices based on economy-wide inflation, captured by the GDP deflator. Core national funding rates are averages; different local authorities will receive different core funding rates.

A big uplift in targeted funding for disadvantaged children

While core funding rates aren’t changing much in real terms, the government also announced that targeted funding for disadvantaged children will rise to (up to) £570 a year - a 44% real-terms increase.

This is a major uplift in the Early Years Pupil Premium. For the first time, its value per hour will be comparable to the pupil premium funding that schools receive for disadvantaged pupils (though since EYPP only applies to part-time childcare entitlements, the total funding will still be half as much as for schools).

It does, however, come on the back of multi-year freezes to EYPP between 2017-18 and 2021-22, the cumulative effect of which was to reduce the amount of resources available to support disadvantaged children. Only this year was the real value of EYPP restored to its 2017-18 value.

Figure 2. Cash- and real-terms funding for Early Years Pupil Premium and Disability Access Fund

Note: Uses HM Treasury, GDP deflators, November 2024. The Early Years Pupil Premium offers top-up funding for childcare providers looking after children from disadvantaged backgrounds. The Disability Access Fund also offers top-up funding in respect of children receiving Disability Living Allowance.

Will a big boost for disadvantaged children be enough to achieve the Plan for Change?

One of the six new Plan for Change targets aims to have 75% of children achieving a ‘good level of development’ by the end of Reception – up from 67.7% last academic year. Focusing on pre-school provision for disadvantaged children is a sensible strategy to achieve this: just over half of children who are eligible for free school meals in Reception are meeting the target, compared to 72% of their better-off peers. These inequalities are already evident before children start school, , and high-quality early years provision can help to level the playing field.

But the early years pupil premium is only a relatively small part of the wider early years landscape. More broadly, early years spending has become less – not more – targeted towards disadvantaged children over time. The share of 2-year-olds eligible for early education targeted at disadvantaged children has fallen from 38% a decade ago to 27% in 2022-23. New childcare entitlements are targeted at working families, and so the poorest third of families will see little direct benefit from the new offer. There are other benefits to supporting working families with their childcare costs. But when it comes to achieving big goals around early years development, yesterday’s announcements are a fairly small nudge in the right direction.

Figure 3. Share of early education and childcare subsidies targeted at different groups 

Source: IFS Education Spending microsite, “Early Years” – Figure 4.