Funding injection for two-year-olds may make or break nurseries

Children's Nurseries UK Market Report 2012, by market intelligence provider Laing and Buisson, found that the positives to be had from a rise in the under-fives population were largely offset by the drop in under-threes attending childcare, leaving settings seeking to fill this gap. While the under-fives population increased from 3.5 to 3.9 million between mid-2006 and mid-2011, 'slightly fewer' children attended nurseries last year, says the report, causing occupancy rates to slip from 81.5 to 81 per cent in the year to March 2012.

The proportion of threeand four-year-olds in nursery last year held firm at around 19 per cent, but that for under-threes fell from 14.2 per cent in March 2008 to 11.2 per cent in March 2012. The report attributes the decline to rises in informal childcare and stay-at-home parents as a result of the economic downturn. Cuts to the childcare tax credit were also seen as a contributory factor.

In response, nurseries increased fees by an estimated 3.2 per cent, against RPI inflation of 5.2 per cent, and hourly rates of pay by just 0.5 to 1 per cent across qualified and unqualified staff. (The minimum wage increase for 2010/11 was 2.2 per cent.)

The small fee rises meant spending on nurseries' services contracted in real terms in 2011 to £4.3bn, a 3.6 per cent drop, though market value for 2011 was the same in real terms as that of 2007.

Report author, economist Philip Blackburn, concludes, 'It's challenging and tough but many struggling nurseries have already exited the sector and the better performing ones are surviving. Many of the nursery groups look to be doing quite well, implementing positive growth plans with adequate backing. Last year (2011) also registered marginal growth in supply capacity and in net nursery stock, the first since 2007.

'Nurseries will be supported by some growth in the economy from 2013 and the higher under-fives population for the time being. However, the drop in under-threes attending daycare is worrying, so most nurseries may welcome an injection of funding for two-year-olds on the right terms.'

Of concern too is cross-subsidy between local authority funding and self-paying parents, he added, as is the reduction in tax relief for higher-rate taxpayers using nursery vouchers, which now account for almost 30 per cent of total market value.

Funded places for up to 40 per cent of two-year-olds by September 2014 has the potential to lift volume demand by 15 per cent - or 85,000-95,000 children.

According to Laing and Buisson's 2012 findings, only two-fifths of nurseries received adequate funding for threeand four-year-olds, while slightly more nurseries (41 per cent) reported adequate payments for two-year-olds than not (39 per cent). A fifth didn't know either way.

'The big question is whether funding for two-year-olds continues to cover costs as local authorities ratchet up supply,' says Mr Blackburn. 'Adequate funding will be imperative for future sustainability in a sector that is to become more reliant on Government spending.'

• Children's Nurseries UK Market Report 2012, priced £780 for a hard copy and £1,140 for a hard copy and digital files, can be bought at: www.laingbuisson.co.uk.