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 are the latest step in establishing early education and childcare as the newest branch of the welfare state. 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 £4.2 billion in 2018–19, before falling back slightly to £4 billion last year. The Budget reforms, when fully implemented, will see spending double yet again to reach just 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 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. 

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 provider 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, 2022).

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 provider expenditure (namely, staff costs, food, rent and utilities). This index summarises how the prices facing childcare providers (excluding childminders) have, on average, changed since 2017-18 – the financial year in which hourly spending on the 3- and 4-year-old free entitlement peaked.

Figure 3 compares this measure of price rises facing childcare providers to the evolution of free entitlement funding. In green is the cash-terms funding for the free entitlement (as allocated through the Dedicated Schools Grant) while the yellow series shows real-terms funding once rising childcare providers’ costs are considered. Figure 3 also shows real-terms funding as measured by the GDP deflator which captures economy-wide inflation. We use both the GDP deflator forecast from November 2022 (shown in dark grey) as well as the forecast at the time of the last spending review in 2021 (the light grey series) to give a sense of how much higher-than-expected inflation has impacted the funding settlements announced at the time.

As Figure 3 shows, cash-terms free entitlement funding has been on an upwards path since 2017-18. The 2021 Spending Review delivered a substantial uplift this year (2022-23) and is set to remain at this higher level over the coming years. Based on inflation forecasts in place at the time of the settlement, this implied total resources for the free-entitlement would fall by around 2% in real-terms by 2024-25, compared to 2021-22.

However, higher-than-expected inflation is expected to fully undo the impact of the uplift. Considering rises in costs specific to childcare providers, we expect a 9% real-terms cut to total budget between 2021-22 and 2024-25 under the 2021 Spending Review plans.

Most recently, the government announced some additional funding for existing entitlements as part of the 2023 Budget. Overall, this uplift is broadly enough to keep funding flat in real terms (when inflation is measured by the GDP deflator). However, there will be important distributional questions: the government is planning a 30% uplift to the 2-year-old funding rate next year, which will mean a much tighter squeeze on funding for 3- and 4-year-olds.

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.