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Funding for early years likely to fall by 8% to 2024 as a result of faster-than-expected cost rises

"Early years providers are facing rapidly rising costs that are eroding the value of their budgets."

The early years sector in England received a significant uplift to its budget at the last Spending Review in 2021, bringing total annual spending from £3.6 billion in 2021–22 to about £3.75 billion a year (in cash terms) between 2022–23 and 2024–25. This covers spending on the entitlement to 15 hours of early education and childcare for all 3- and 4-year-olds and some 2-year-olds, and 30 hours for 3- and 4-year-old children of working parents.

But higher-than-expected inflation means even that increase will not compensate for rising costs.We estimate that childcare providers’ costs are likely to rise by 9% in total between this year (2022–23) and 2024–25. Judged against these rising costs, total funding for the free entitlement will be 8% lower in real terms in 2024–25 than it is this year.

A shrinking population of young children means these resources will be spread across fewer people. Even so, our modelling suggests that core funding per hour, which had been set to rise over the Spending Review period, is now likely to be on a downward path in real terms. Under our illustrative scenario, today’s core funding rate of £5.06 an hour for 3- and 4-year-olds will fall by 14p in real terms by 2024–25.

These are among the findings of a new IFS report on government spending on the early years and childcare, funded by the Nuffield Foundation as part of a wider programme of work on education spending. The report also finds that:

  • While inflation is currently squeezing the budget for free childcare hours, real-terms spending on free childcare hours has more than doubled since 2009–10, from around £1.7 billion to more than £4 billion last year (all figures in today’s prices).

  • This is in contrast to other stages of education, and many other public services, where budgets have been cut over this period.

  • Most, but not all, of this increase in spending has been driven by expansions to the number of childcare hours on offer.

In addition to the free entitlement, families can also receive support for childcare through the in-work benefit system and via tax relief, which are the only forms of support available for children not covered by the free entitlement. The report shows that there have been dramatic changes in spending on these other forms of childcare support:

  • In 2009–10, government spending on childcare subsidies through the benefit system stood at £1.8 billion in today’s prices, roughly equalling spending on the free entitlement.

  • Since then, spending on subsidies through the benefit system has fallen by nearly two-thirds to £640 million in 2021–22.Most of this decline reflects a longer-term trend of falling spending through the benefit system, linked to less generous payments and reduced caseloads.

  • Spending on tax reliefs had been rising, from £510 million in 2009–10 to just over £1 billion the year before the pandemic. But spending fell sharply during the pandemic years and has fallen well short of government plans for spending on the new system of tax-free childcare. It is not wholly clear why families are missing out on support through this new system.

Elaine Drayton, a Research Economist at IFS and an author of the report, said: ‘Over the past decade or so, the government has prioritised the early years above other stages of education, rolling out new childcare entitlements for disadvantaged 2-year-olds and for 3- and 4-year-olds in working families. This has meant increasing spending on free childcare hours while other public services have seen cuts.

‘But early years providers are facing rapidly rising costs that are eroding the value of their budgets. Childcare providers’ costs had already been rising faster than economy-wide inflation over the last few years, but they face an even steeper rise in the coming years. That will leave government funding for the free childcare programme much lower than had been intended when the budget was last set in 2021.’

Josh Hillman, Director of Education at the Nuffield Foundation, said: ‘This important report explains the substantial gap between the funding settlements for early years education – which in 2021 looked set to keep resources on an even keel – and a much more difficult reality. Very real cost pressures on childcare providers and families make early years provision for all pre-school children much more precarious. The IFS analysis also highlights the long-term squeeze on childcare subsidies through the benefit system, which is the only form of support available to many children in low-income families who aren’t the right age to receive a funded childcare place.’

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