All 3- and 4-year-olds in England, and some disadvantaged 2-year-olds, are entitled to 15 hours a week of free early education during term-time, with 3- and 4-year-old children of working parents also entitled to an additional 15 hours. Funding for these ‘free’ hours flows from the UK government to local authorities, which then distribute the funding to childcare and early education providers. Since 2016, funding has been calculated based on a per-hour rate multiplied by an estimate of the number of hours of free childcare used in that local authority.

To get this estimate, the government asks providers to record the number of hours children are using in a particular week – census week – in January. This is then multiplied by 38 (the number of weeks in an academic year) to arrive at an overall estimate of free childcare use in a given year. This process is based on a number of assumptions – a key one being that the census week is roughly representative of the take-up of free early education hours across the academic year, balancing out relatively lower usage in the autumn term and relatively higher usage in the summer.

As a result of the COVID-19 pandemic, the government funded local authorities in respect of any providers who were open during the autumn term (or shut for public health reasons like local restrictions). This funding was allocated on the basis of pre-pandemic take-up (measured in January 2020). The aim was to continue providing public funding for early education as if the pandemic had not happened. This offered some financial protection and certainty to providers during an autumn characterised by local and national lockdowns and frequent closures in response to COVID-19 cases. But it also meant that many providers were receiving funding for children who were either temporarily or permanently absent from their setting: funding was, in effect, no longer ‘following the child’.

Childcare funding for the rest of this year

The intention had been to return to the pre-pandemic system from this term, with funding for the rest of this academic year based on attendance at childcare settings this week. Of course, while childcare providers are allowed to remain open, England is still under a national lockdown, which is likely to affect childcare attendance. Throughout the pandemic, the Department for Education has been collecting data each week on the number of children aged 0-4 actually attending childcare settings on a given day. The latest figures, based on Thursday 14th January, suggest that attendance that day was just over half of what would have been expected in ‘normal’ circumstances, equivalent to half a million fewer 0-4 year olds attending childcare. If this low take-up were reflected in funding levels for the rest of the academic year, it would have serious financial implications for local authorities and childcare providers.

Sensibly, this approach has been revised – albeit rather late in the day and with minimal transparency. Guidance, issued just last week directly to local authorities (and not yet published on the Department for Education website describing the funding process) asks providers to complete this year’s census based on the number of children registered for places – even when those parents are choosing to keep their children home for now. The Department has also said that it will fund any additional places over and above those currently registered during the spring term, at least up to 85% of January 2020 attendance levels.

In effect, this approach treads a line between a funding model which ignores any implications of the pandemic for the use of free childcare (by basing it on attendance in January 2020) and one which effectively assumes that current take-up represents the ‘new normal’ for the rest of the year (basing it on attendance in January 2021). It seems to be attempting to capture some of the changes to childcare demand that might persist in the medium term (for example, as providers become unviable or parents choose not to send their children to nursery to take up their free hours), without assuming that physical attendance at settings this month will continue for the rest of the year.

Indeed the Department for Education’s data on children attending early years settings during the pandemic shows that this can change pretty quickly. These data, which include all children under 5 (not just those receiving the free entitlement), suggests that childcare attendance increased from roughly 50% of expected levels in September to over 90% in November, then back down to around 50% in January.

Why is the Department for Education not proposing to fund all increases in take-up?

While physical attendance this week is clearly not a good basis for funding providers, it is not clear that current registration levels will reflect childcare demand for the rest of the year either. For example, children with birthdays during the autumn term would have been expected to start accessing their free childcare hours this term, but it is unclear whether parents would have registered their children to do so, in light of current circumstances.

If current registration levels do turn out to be an underestimate of the demand for free early education places later in the term, many local authorities may find themselves relying on the Department for Education’s promise to fund additional places. But it is not clear why the extent of this support is capped, nor why 85% of January 2020 levels would be the right cap to impose. No explanation is provided in the official guidance. The guidance also doesn’t explain what will happen if attendance rises further during the summer term.

Ultimately, it is up to local authorities to ensure ‘sufficient provision’ of free entitlement places to meet local demand. This means that, where take-up rises above 85% of its January 2020 levels, it could be up to local authorities to find funding for these places, even though this would traditionally have been funded by the UK government. And the speed with which take-up rates have changed over the last few months, together with the heights they reached in November 2020 – during a national lockdown – suggest that there is a real possibility that childcare demand will rise relative to current registration levels, and reach levels in excess of 85% of pre-pandemic attendance in many areas.

Many of the questions around the right level of public funding for the next eight months revolve around balancing the risks to the childcare sector against the costs to the public purse. For the first nine months of the COVID-19 pandemic, the government’s approach was to modify its funding rules to try and preserve the market for publicly funded childcare in essentially the same position as it was before the pandemic. Now, with vaccines being rolled out and the hope that the virus can be brought under control over the coming months, there is a ‘new normal’ on the horizon – but we are certainly not there yet. The risk that the government faces in tightening the funding environment now is that some otherwise-viable providers will go bust, and it will be costlier and more difficult to rebuild this capacity later on than it would have been to support it to stay open.

In this context, the decision to cap funding increases as a result of rising take-up during the spring term at 85% of 2020 levels seems particularly ill-advised. The providers and local authorities who will be hurt the most by this will be those where take-up quickly recovers to close to normal levels. Squeezing funding for these local authorities, and potentially the providers within them, means that funding over the coming months will be tightest exactly where there is most demand for childcare.

The role of local authorities

The question of how local authorities have supported providers since the start of the pandemic and what impact this has had on local childcare markets is one of the issues we are investigating as part of a new project funded by the Nuffield Foundation. We hope this will provide important new insights into the role local authorities play in this area as well as robust evidence on the types of support that have been most effective at sustaining childcare providers during the pandemic.