Will the Chancellor's childcare reforms work in practice?

The Chancellor called it a ‘landmark’ Budget for childcare reform, but as the dust settles, what does it mean for the struggling childcare sector, and do the sums add up?

The reforms are implicitly aimed at working parents – the current definition for ‘working’ to qualify for childcare entitlements being an average of 16 hours a weekat the National Minimum Wage or National Living Wage for each parent earning less than £100,000.

The reforms, as the Institute for Fiscal Studies (IFS) points out, will ‘radically change the way that childcare subsidiesare targeted’, with the share of childcare subsidy spending targeted at working families set to more than double.

The Government seems to have finally cottoned on to the fact that there is a wealth of untapped female talent that could boost the economy if only there were more affordable childcare, with the Chancellor highlighting that ‘almost half of nonworking mothers say they would prefer to work if they could arrange suitable childcare’.

Funding

Most commentators were quick to express concern that the funding promised will not solve the current crisis in a sector already struggling with underfunding for the existing 30 hours entitlement for three- and four-year-olds and a workforce crisis. The Budget report said the Government will ‘substantially uplift the hourly funding rate paid to providers to deliver the existing free hours offer in England’ to the tune of £204 million in 2023-24, increasingto £288 million in 2024-25.

This only covers approximately 10 per cent of the £2 billion shortfall from the Department for Education's own data in 2021.

As the IFS has highlighted, there are serious risks to the market if places are not funded adequately (see box).

There was no detail of funding rates in the Chancellor's speech, but children's minister Claire Coutinho, writing exclusively in Nursery Worldthis week (see page 12), says, ‘Alongside the 4 per cent increase to uplift the average rate for three– to four-year-olds to over £5.50 per hour from September 2023, there have been clear promises from the Chancellor of more to come’.

She also states, ‘Over the next couple of years, the entitlements will also expand to 30 free hours for eligible working parents of children aged between nine and 36 months. This will be fully rolled out by September 2025, giving parents of very young children more choice as they consider going back to work.

‘…we will match that again with appropriate funding rates – set to be around £11 per hour for under-twos from the introduction of the offer.’

Supply of places

Among parents there is likely to be huge demand for the expanded entitlements.

The Chancellor said the reforms would be phased in to allow for the sector to build supply, but with nurseries facing a recruitment crisis, time is not all that is needed.

Neil Leitch, chief executive of the Early Years Alliance, said it was unclear how the Government intended to ensure there would be sufficient supply of childcare places to expand the offer for one- and two-year olds.

‘At a time when settings are closing at record levels and early educators are leaving the sector in their droves, unless the proper infrastructure is put in place by the time the extended offers are rolled out, many parents of younger children expecting funded places to be readily available to them are likely to be left sorely disappointed – and the token offer to new childminders announced today is likely to do little to change this,’ he said.

Matt Arnerich, director of brand and communications at childcare software provider Famly, said, ‘We are seeing more of our nursery partners close down every week than ever before, simply because it is becoming unsustainable for them to keep their doors open.

‘Our providers were already seeing an overwhelming number of requests from parents when the extension of subsidised childcare was floated. Now that it is official, we can only imagine the admin burden this will cause.’

Female employment versus child development

The Government is now clearly targeting expanding support at working families, shifting away from universal childcare entitlements. Where does that leave disadvantaged families, who are unlikely to qualify for the offer, and yet a wealth of research suggests are the ones who benefit the most from childcare offers?

According to the IFS, the expansion of the free entitlement will directly benefit just over half of parents with a child aged nine months to two years old. That includes just a fifth of families earning less than £20,000 a year, but 80 per cent of those with household incomes above £45,000 (based on 2019 data).

Currently, just under half of total spending on childcare subsidies goes on universal entitlements, that is the 15 hours for all three- and four-year-olds. The IFS estimates that the share is set to fall to about a quarter by 2027. Commentators have pointed out the impact this could have on disadvantaged families.

June O’Sullivan, chief executive of the London Early Years Foundation (LEYF), which operates 40 social enterprise nurseries, said, ‘Unfortunately, given the focus of the additional hours on working families alone, we expect this will have an adverse impact on the disadvantaged children and families who most need the support – thereby increasing the attainment gap.’

Eva Lloyd, professor of Early Childhood at the University Of East London, warned, ‘As new public money becomes available for the childcare sector, there may well be a feeding frenzy among large private-equity-supported chains. New predatory childcare chains are also likely to emerge. Unless the Government enforces regulations concerning how public funding is spent within the sector, no significant expansion of childcare will result and the social segregation increasingly characterising childcare provision will worsen.’

Ratios

Shortly after the Chancellor gave his Budget speech, the DfE published its long-awaited response to the ratios consultation. This revealed that despite most respondents being against the plans, the Government would press ahead with increasing ratios for two-year-olds from 1:4 to 1:5.

Aside from serious concerns around safeguarding, this also has funding implications for nurseries and pre-schools.

Purnima Tanuku, chief executive of the National Day Nurseries Association, said, ‘Nurseries will now have to deal with parents’ expectations that their childcare costs will be reduced even though most have told us they won’t be altering the ratios. As the Government looks to expand funded places for two-year-olds, it's absolutely vital that funding is based on existing ratios, on what providers are actually delivering, what parents want, and not on unrealistic ratios. With many more young children poised to take up their places next year, the two-year-old funding will have a much bigger impact on settings.’

Finally, there is a general election next year, and many of these timescales cross the election cycle. The Conservatives appear to have stolen Labour's thunder by setting out plans to reform childcare from the end of parental leave, an ambition already set out by Labour last year although with few details to date other than expanding breakfast clubs.

Labour's shadow education secretary, Bridget Phillipson, has pledged to reform the Government's ‘broken childcare system’ as her first priority if elected, and has promised more to come in addition to the breakfast clubs pledge to develop ‘a modern childcare system’ from the end of parental leave up until the age of 11.

Watch this space.

Expert view: Christine Farquharson, IFS

Based on existing patterns of childcare use, this reform will leave Whitehall in charge of the price of 80 per cent of all pre-school childcare in England (up from just under 50 per cent now). That raises the stakes for getting the funding rate right: too low, and providers could opt out of delivering the new entitlement or even exit the market entirely. That could leave today's promises a theoretical entitlement only, and risks making it even harder for parents to find a childcare place.

Extra funding for existing entitlements, worth £288 million in 2024-25, will broadly be enough to protect total spending in real terms over the next few years. Most of that will, at least initially, go on delivering the 30 per cent uplift to the two-year-old funding rate.

For such a huge reform, the Budget gave us remarkably little detail about the one thing that will really matter: the funding rate that providers will receive to deliver the new entitlements. We estimate that the rate for two-year-olds could reach around £8.25 an hour by 2027 (in cash terms), which would allow a rate close to £11 for under-twos. But these rates are rough estimates only – given how crucial these rates will be to the deliverability of the offer.

The Chancellor is expecting his reforms to bring another 60,000 parents into employment, working an average of 16 hours per week, with a similar impact from increasing the hours of parents who would have been in work anyway.

It represents a potentially very large giveaway for beneficiaries. The typical gain for a parent using 30 hours of childcare for a two-year-old would be larger, for most full-time working women, than abolishing all their income tax and NICs. Delivering a package so explicitly focused on helping parents to work through the free entitlement system looks odd. The ‘30-hour’ offer is based on term-time take-up (38 weeks a year). If parents spread their hours out over the year, the offer is closer to 22 funded hours a week.

Childcare reforms – key points

Extending ‘free’ childcare for working parents, starting with 15 hours for twos from April 2024 (see box, page 12)

Funding

Increase early years funding by £204 million by September 2023, rising to £288 million in next year, which the Treasury said would ‘substantially uplift the hourly funding rate paid to providers to deliver the existing free hours offer’.

Changing staff-to-child ratios – September 2023

One member of staff will be allowed to look after five two-year-olds, up from the current rule of one to four in England, subject to Parliamentary approval. Changes to ratios are not mandatory, but the Government said would give providers flexibility.

Childminders

Piloting incentive payments of £600 for childminders, rising to £1,200 for those with agencies. Timescales yet to be confirmed.

Wraparound care

The Government will fund schools and local authorities to increase the supply of wraparound care between 8am and 6pm.

Ambition that all schools will offer full wraparound, either on their own or with other schools, by September 2026.

Universal Credit

Support for 700,000 parents on UC by paying childcare costs upfront to help them access ‘subsidised childcare’. Currently, up to 85 per cent of childcare costs can be claimed back. By summer 2023, parents will be able to access the funds upfront to make it easier for them to get a job or increase their hours. The Government says this removes any gap in funds and eases parents into the childcare costs payment cycle.

The maximum amount of support will be increased. Parents will be able to claim up to £951 for one child and £1,630 for two children.