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 £4.6 billion in 2018–19, before falling back slightly to £4.2 billion last year. 

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. . On the back of this precipitous rise, the free entitlement is also set to grow in importance with spending set to double yet again to deliver the Budget reforms, reaching £8.5 billion by 2026–27 (see Figure 1). This is the fastest and largest expansion to date.

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 23% higher by 2023–24. Most of this increase happened between 2010 and 2012. A smaller spike in 2017 reflects the decision to increase funding rates to help providers deliver new extended 30-hour entitlement for 3- and 4-year-olds.

Providers’ resources

The amount of spending on the free entitlement is an important indication of the government’s priorities, but what matters more to childcare providers is the hourly funding rate they receive for children in their care and how this compares to the cost of delivering childcare. 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 from £7.20 to £11.44 between 2017 and 2024, a 60% increase in cash terms. Most recently, rises in employer National Insurance Contributions and the minimum wage announced in the Autumn 2024 Budget will leave many childcare providers with new expenses.

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.

Comparing the funding rate for 3- and 4-year-olds and 2-year-olds to the providers’ cost index, we see that changes to the costs of providing childcare were largely in line with changes in funding between 2016–17 and 2020–21. Recent years have seen a wedge open up between funding rates and provider costs as high inflation and rises in the minimum wage have generated large cost rises for providers. For 3- and 4-year-olds, this has meant that even relatively generous uplifts in 2023–24 and again in 2024–25 have not offset cost pressures. By our estimates, core resources per hour for 3- and 4-year-olds will remain 8% lower in real terms in 2024–25 than in 2016–17 once provider costs are taken into account.

The picture looks somewhat different for funding for 2-year-olds, which saw the largest cash increase in funding rate in 2023–24 since its introduction (30%). Funding for 2-year-olds has also been prioritised this year, with a further 17% cash-terms rise in 2024–25, well above current market prices. Together with generous rates for under 2s (starting at £9.45 in 2024–25), this suggests the government is channelling resources towards younger ages to encourage growth in provision for younger children.

Looking ahead, changes to employers’ NICs and minimum wage rises announced at the Autumn 2024 budget will particularly affect lower-paid workers. These changes create both winners and losers: a small childcare setting with six or fewer employees on median earnings (£33,000) would benefit from the NICs changes due to the more generous employment allowance; providers employing more staff would lose out – and the bigger the employer, the more so.

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) is 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.