Early years

Funded by the Nuffield Foundation

There are at least eight different programmes, across three government departments, aimed at supporting and subsidising early childhood education and care in England.

The free entitlement offer in England

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 March 2023 Budget announced further reforms to expand the free entitlement to cover children from 9 months onwards in working families. These reforms will be phased in over the next three years:

•    From April 2024, 2-year-olds in working families will get access to 15 hours a week of funded childcare.
•    From September 2024, the 15-hour offer will be extended to cover children in working families from 9 months to 2 years.
•    Finally, in September 2025, the entitlement will be doubled to 30 hours a week, 38 weeks of the year. 

Total spending on the free entitlement

The 2023 Budget reforms continue the trend of successive governments in expanding the free entitlement to cover more children and more hours. Total spending on the free entitlement doubled during the 2000s, and then more than doubled again during the 2010s. In today’s prices, total spending peaked at £4.5 billion in 2018–19, before falling back slightly to £4.0 billion last year. The Budget reforms, when fully implemented, will see spending double yet again to reach over £8 billion by 2027–28.

This rapid growth in total spending reflects a choice to prioritise the free entitlement during a period when overall education spending – and spending on many other areas of public services – was falling.

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, which has been repeatedly extended to cover more hours 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 blue) is around 18% 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.

The impact of inflation on providers’ resources 

Rising costs are a challenge currently facing the entire economy, but there are particular pressures on some of childcare providers’ main budget lines.

Around three-quarters of costs for early years providers go on staffing (Department for Education, 2019) and many of these workers are paid at or around the minimum wage. This means rises in the minimum wage have been a significant driver of rising costs in the early years sector over recent years, with the headline minimum wage rising by 39% in cash terms between 2017 and 2023. Other important components of providers’ costs include rent, utilities and food. While these costs have not grown as much as the minimum wage in recent years, they are now rising quickly (Bank of England, 2023).

To understand how providers’ costs are changing, we construct an index of the prices facing childcare providers. We take a weighted average of the prices of the main components of providers’ expenditure (namely, staff costs, food, rent and utilities). This index summarises how the prices facing childcare providers (excluding childminders) have changed on average.

Figure 3 compares this measure of price rises facing childcare providers with the evolution of core funding per hour (which excludes uplifts such as the Early Years Pupil Premium) for 3- and 4-year-olds since 2012–13. In cash terms (represented in green), the core funding rate has increased by more than 20% over the past decade, and most recently has been bolstered by the uplift announced in the March 2023 Budget. Accounting for inflation (measured by the GDP deflator), however, real resources have failed to keep pace, resulting in a 9% decrease in core funding per hour by 2023–24 compared with a decade ago. Despite the Budget uplift, which partially reverses this trend, the core funding rate is projected to remain 4% below its 2012–13 level by 2024–25.

This squeeze on providers’ resources is more pronounced once we consider changes in the specific expenses faced by childcare providers. Under this measure of cost growth, core funding per hour in 2023–24 is estimated to be 16% lower than a decade ago. Even the uplift from the Budget is unlikely to see resources per hour restored to anything like their previous level: on our estimates, core resources per hour in 2024–25 will remain more than 10% lower than in 2012–13. 

For 2-year-olds, the core funding rate has experienced a less significant decline, dropping by 5% between 2015–16 and last year, in today’s prices. From September 2023, there has also been a notable increase in funding rates for 2-year-olds, with the core rate reaching £7.95 for the remainder of the fiscal year and rising to £8.28 (in cash terms) by 2024–25. This increase, along with changes in staff-to-child ratios for 2-year-olds introduced in the March 2023 Budget, is expected to leave providers catering to younger children with more resources compared with the peak of core funding per hour in 2017–18. 

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. The trend towards ever-greater emphasis on the free entitlement (and lower spending on childcare support in the benefits system or through tax-free childcare) will be accelerated by the Budget 2023 reforms. 

The waxing and waning importance of different programmes of support for early childhood education and care has significant distributional consequences. Figure 4 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, 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 2022 just 22% 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.

There will be even bigger changes once the Budget 2023 reforms are fully implemented. Universal spending will fall from just under half to just over a quarter of the total early years budget, while spending targeted at working families is set to double from 30% to nearly 60% of total spending.