Funding - the hard facts

It’s finally happening. After years of calling for the issue of underfunding in the early years sector to be addressed, government is finally conducting a review into the cost of delivering free entitlement places – and more importantly, into what this means in terms of the sector’s funding needs.

On the positive side, the review is certainly wide-ranging: alongside the recent provider call for evidence (which closed on 10 August), the government also launched an online survey for parents, as well as running a series of provider roundtables across the country, holding consultation sessions for employees of large corporate organisations, and commissioning an independent agency to carry out research into the cost to PVI providers of delivering funded childcare.

Clearly, this review – the results of which are due to be published in the autumn –  marks a huge opportunity for the sector, not only to ensure that the additional free entitlement hours are properly funded, but also to tackle the historic insufficient funding for the existing hours.

It’s a point I’ve made before but I think it bears repeating: it wasn’t so long ago that the Department for Education (DfE) said that it was ‘nonsense’ to suggest that the sector was underfunded. Given this, it’s undoubtedly positive that the government has publicly committed to address the issue of underfunding.

The question we now need to be asking, then, is: what exactly do we mean by 'addressing the problem of underfunding'. Because there is a real danger that what the government feels constitutes a solution to this problem does not align with the sector’s expectations.

There are already indications that that the government is not willing to put enough money into the sector. They’ve repeatedly stressed the need for a solution that 'delivers value for money to the taxpayer”' (I don’t know about you, but to me, this screams: 'There’s only so much we’re willing to spend on this'). They pledged an initial £350m for the scheme, despite previously arguing that Labour’s pre-election pledge to deliver 25 hours of week of funded childcare for eligible three- and four-year-olds would cost 'an extra 1.5 billion at least' (it’s worth noting that this figure aligns closely with the results of the independent research commissioned by the Alliance, which show that the cost of delivering the Conservative’s 30 hours pledge would be around £1.6bn). Figures released by the Treasury following the Summer Budget revealed that funding for the 30-hour scheme is now set to increase year on year (up to £670m in 2020-21) – but clearly, this is still long way from what’s actually needed.

So there’s a good chance that any increase in government funding won’t be enough to plug the existing gap. But what is perhaps even more worrying is the seemingly short-term approach the government is taking to the review.The DfE has promised to 'uplift' the hourly rate of funding following the review, implying that any change will be a one-off increase. But common sense tells us this is far from right approach. Because even if this ‘uplift’ is enough to plug the current funding gap, unless a mechanism is put in place to ensure that funding continues to cover costs going forward, inevitable increase in provider business costs will mean that, in very little time, the sector will be facing the same problem all over again.

With this in mind, the Alliance recently commissioned Ceeda (the independent research company that carried out the research for our initial study on funding shortfalls) to look into the potential impact of a range of cost factors likely to impact on early years providers (specifically, non-domestic PVI settings, as in the original study) in the near future.

We felt it was vital to ensure that the data was as in-depth and accurate as possible; as such, for example, as well as adjusting the calculations for the more obvious cost factors such as the introduction of a ‘National Living Wage’ (NLW) of £7.20 per hour for over-25s in 2016 (a move that in and of itself would result in a sector-wise shortfall of £405m at current funding rates), the data also takes into account the need for providers to maintain wage differentials, revealing that, if the PVI non-domestic sector introduced a minimum 3% pay increase alongside the NLW, the sector-wide shortfall would increase to £446m. By 2020, when the NLW is set to increase to £9.00, the forecasted shortfall will rise to £705m if only taking the impact of NLW into account, and £733m if wage differentials are also applied.

It’s important to note that these calculations have already been adjusted to allow for a range of other factors: the planned increase in the National Minimum Wage for younger staff in October 2015, changes to National Insurance contributions, changes to employer pensions contributions and, where appropriate, the impact of inflation on non-labour-costs.

And of course, these are just the changes we know will come into effect. There are a number of potential costs that are less certain or easily quantifiable: the proposed apprentice training levy (only vague details of which were announced in the Budget); new paediatric first aid training requirements; and, for smaller, sessional settings, rising village hall rent costs resulting from an impending increase in insurance premium tax from 6 per cent to 9.5 per cent.

At the same time, demands on providers continue to grow – in particular, calls for a ‘graduate-led workforce’, a shift that the government (and Ofsted) argue would improve the quality of provision, particularly for children from more disadvantaged backgrounds. What has been less forthcoming, however, are any estimates as to what the cost impact of this ambition might be. As such, we asked Ceeda to produce a second set of data which was additionally adjusted to assume that all settings in England employed at least one Early Years Professional (EYP) or Early Years Teachers (EYT).

The results were startling. Continuing to take into account the impact of the NLW, wage differentials, pensions contributions and so forth, becoming a fully graduate-led sector would, on current funding rates, result in a sector-wide shortfall (again, for the PVI non-domestic sector only) of £814m by 2020/21. This equates to an annual funding gap of £1,162.80 per funded two-year-old, and £1,470.60 per three- or four-year-old taking up the 30-hour offer.

Of course, the hope and assumption is that, by 2020, providers won’t still be being funded at 2014/2015 rates. But what the data does highlight, and very clearly, is the scale of the problem that needs solving, and the need for government to fully understand not just current cost factors, but future ones too.

These are all arguments that the Alliance is committed to making to government, and all the data from this research was detailed in our official response to the DfE’s call for evidence (you can view our response in full on our website: www.pre-school.org.uk).

We continue to believe that – while the personal experiences of those working in the sector should never be ignored – evidence-based, fact-driven arguments are key to presenting a convincing argument to government; indeed, it is what brought about the funding review in the first place. And so this is the approach we will continue to take to make sure that the necessary practical changes are put in place to support providers and ensure the long-term sustainability of the sector as a whole.