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Education spending - early years

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Early years spending in England

Unlike schooling, further education and higher education, support for learning during the early years does not always fit neatly into a single box. There are at least eight different programmes, across three government departments, aimed at supporting and subsidising early childhood education and care in England.

Total spending on the free entitlement

The largest group of programmes – and the one most recognisably aimed at early education – is the trio of ‘free entitlements’ to funded early education and childcare places, paid for by the Department for Education:

  • The universal entitlement offers all 3- and 4-year-olds a part-time (15-hour) place for 38 weeks of the year.
  • The extended entitlement, introduced in 2017, offers an additional 15 hours a week of childcare to 3- and 4-year-olds in working families.
  • The 2-year-old offer, introduced in its current form in 2014, provides the roughly 40% most disadvantaged children with a part-time early education place, again for 38 weeks a year.

The 2010s saw a step change in total spending on the free entitlement. In 2009–10, total spending on free entitlement programmes stood at around £1.7 billion (in today’s prices). Over the following decade, spending more than doubled to reach a peak of £4 billion in 2018–19, before falling back slightly to £3.8 billion last year. This rapid growth in total spending reflects a choice to prioritise the free entitlement during a period when overall education spending was falling.

Note: ‘Universal’ entitlement refers to the entitlement to 15 weekly hours of funded care for 3- and 4-year-olds during term time. The ‘extended’ entitlement captures the additional 15 hours a week that 3- and 4-year-olds in working families can access. The 2-year-old offer provides 15 hours of funded childcare to 2-year-olds in disadvantaged families. It was initially piloted in a small number of areas in 2012, before being rolled out nationally in 2013. Since our data on total spending do not split out the universal and extended entitlements, we allocate total spending proportional to their budgets from the Dedicated Schools Grant.

Source: See https://ifs.org.uk/education-spending/methods

Spending per child and spending per hour

This substantial growth in total spending on the free entitlement is driven to a large extent by increases in the generosity of the free entitlement. This has been repeatedly extended to cover more hours, more weeks and more children. Moreover, since nearly all 3- and 4-year-olds take up their universal entitlement, population growth tends to push up total spending.

In Figure 2, we therefore show how three measures of spending on the 3- and 4-year-old entitlement have changed relative to their level in 2009–10. While spending per place and total spending have doubled since 2009, spending per hour (shown in purple) is around 30% higher. Most of this increase happened between 2010 and 2012. A smaller spike in 2017 reflected the decision to increase funding rates to help providers deliver the new extended entitlement.

Note: Spending on universal and (from 2017) extended entitlements for 3- and 4-year-olds. Spending per place is spending per part-time-equivalent place (15 hours) across both entitlements, so a child accessing their full universal and extended entitlement would count towards two PTE places.

Spending per hour during the pandemic

The rate of spending per hour over the last two years is more difficult to analyse, since it is strongly affected both by pandemic-related support to the sector and by challenges with measuring economy-wide inflation. Exceptionally, during 2020–21, funding allocations were based on pre-pandemic attendance at early years settings and not adjusted for falling take-up. While attendance in January 2021 was based on registered places (rather than the number of children actually attending settings during a national lockdown), attendance figures were still somewhat low – meaning that a ‘normal’ amount of funding is divided by a smaller-than-usual number of children, leading to a higher-than-usual estimate of hourly spending.

To give a more accurate picture of how spending has changed over the past two years, Figure 3 therefore shows two different measures of hourly spending. In lighter colours, we show the rate of spending per hour. This wider measure of spending corresponds to the series in Figure 2, and includes wider elements such as the Early Years Pupil Premium, additional support for maintained nursery schools, and local authority top-ups. This series is affected by difficulties in measuring pupil numbers.

In darker shades, we show a weighted average of the local-authority-specific funding rates used to allocate money in the Early Years National Funding Formula (and its predecessors). This series of core funding per hour provides a more reliable indicator of the ‘direction of travel’ for per-hour funding over the last two years.

Note: ‘Core’ funding is derived from allocations through the Early Years block of the Dedicated Schools Grant as the (weighted) average of local authorities’ core funding rates through the Early Years National Funding Formula. Our measure of ‘wider’ spending incorporates additional spending on free entitlement hours, including through dedicated uplifts and any additional funding provided by local authorities. Projected core funding rates assume a cash-terms freeze in the core funding rate at 2022–23 levels

Between 2012–13 and 2019–20, hourly funding for both the 2-year-old and the 3- and 4-year-old entitlements followed a ratchet pattern. Funding for 3- and 4-year-olds was frozen in cash terms at around £4.50 between 2012–13 and 2016–17, before jumping to £4.77 (cash terms) with the introduction of the extended entitlement in 2017–18. The cash-terms freeze led to a real-terms decline as spending power was eroded by inflation.

Most recently, 2020–21 and 2021–22 have each seen small cash-terms increases to the funding rate (around 1–1.5%), which is roughly enough to offset inflation and provide protection in real terms. The funding rate for 2-year-olds has followed a similar pattern, and most recently stood at £5.56 an hour.

The government has also given some details about the core funding rate for 2022–23. The core rate for 2-year-olds will rise by 21p an hour; 3- and 4-year-olds in most local authorities will see their core funding rate rise by 17p (both in cash terms). As Figure 3 shows, this will be enough to bump up the core rate slightly in 2022–23. But inflation will more than erode these gains the following year, leaving core funding per hour at its lowest-ever level by 2023–24.

While the increase in core funding per hour will not provide any substantial relief to providers, the government has also made provisions to increase some of the targeted uplifts in the funding system. The Early Years Pupil Premium (for disadvantaged children) will be increased for the first time ever, rising from 53 to 60p an hour. Maintained nursery schools will see their supplement increased by 3.5% in cash terms. The biggest proportional increase is for the Disability Access Fund, which will rise from £615 to £800 per eligible child. All of these will contribute to the wider rate of spending per hour, even though they are not reflected in the core funding rate.

Wider spending on the early years

The free entitlement accounts for the lion’s share of spending on the early years, particularly over the past decade. Figure 4 shows the trends in total spending on: the free entitlement; subsidies through the tax system (such as tax relief on tax-free childcare and employer-sponsored childcare vouchers); and subsidies through the benefits system (which directly offsets 70–85% of eligible childcare spending done by low-income working families).

The last two decades have seen a tremendous shift in how early years spending is allocated. There was rapid growth in spending through the benefits system over the 2000s, driven in part by an increasing generosity of the subsidy (which rose from 70% to 80% of eligible spending in 2006–07); in part by a rise in claimant numbers; and in part by the above-inflation rise in childcare costs (which pushes up the total amount of eligible spending).

Since 2009–10, this pattern has largely reversed, and spending on childcare subsidies through the benefits system is now only around a third of its peak level. Much of the change came from sharp cuts in welfare generosity in the early 2010s, including a return to the 70% subsidy rate in 2011–12. The more recent decline in spending is driven mainly by shrinking caseloads.

By contrast, the cost of waiving income tax and National Insurance contributions on some childcare spending has risen over time, and now exceeds spending through the benefits system.

Note: Free entitlement spending includes spending on the universal entitlement for 3- and 4-year-olds, the extended entitlement for 3- and 4-year-olds in working families, and the entitlement for disadvantaged 2-year-olds. Spending through the tax system includes the value of tax reliefs via employer-sponsored childcare vouchers and tax-free childcare, but not the value of VAT exemptions. Spending through the benefits system includes childcare subsidies in universal credit and its predecessors. Spending through universal credit is imputed based on modelling estimates from TAXBEN; see Farquharson (2019) for details.

Distributional consequences

The waxing and waning importance of different programmes of support for early childhood education and care has significant distributional consequences. Figure 5 shows the share of the early years budget allocated to different groups: universal services (the 3- and 4-year-old entitlements), support targeted at working families through tax reliefs,1 support for low-income working families through the benefits system, and support for low-income families (working or not) through the 2-year-old entitlement.

Taken together, while around 45% of early years support was ringfenced for low-income working families in 2007, by 2020 just 19% of support was explicitly targeted to low-income families (working and not). By contrast, support targeted at workers further up the income distribution has grown from a tenth of the overall pot to a third.

Note: ‘Universal’ refers to spending on the universal 3- and 4-year-old free entitlement. Childcare support targeted at low-income families includes the 2-year-old free entitlement, and support for low-income working families comprises childcare subsidies in the benefits system. Support targeted at working families includes the extended entitlement for 3- and 4-year-olds and the cost of employer-supported childcare and tax-free childcare.

 

[1] This largely excludes low-income working families, since households receiving universal credit are not eligible for tax-free childcare.

Methods and data

Our methods and data section can be found here. 

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