Expanding the 'free entitlement' to a funded childcare place to children aged two and under in working families will save the average family with a toddler using formal childcare over £80 a week. Those using full-time formal childcare, or with multiple young children, or living in London and the Southeast, are set to benefit considerably more.
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.
More financial pressure on providers also risks the quality of care on offer. A large expansion of free entitlements alongside under-funding of providers would certainly be to prioritise the parental employment purpose of childcare over the child development purpose.
Extra funding for existing entitlements, worth £288m 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 that Chancellor Hunt promised yesterday.
For such a huge reform to the early years system in England, yesterday's 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, under an illustrative scenario for funding rates, 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, it seems odd indeed not to have greater information from government about what it intends.
Public spending on childcare
- Based on existing childcare use, the expansion of the free entitlement will directly benefit just over half of parents with a child aged 9 months to two-year-old 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).
- Today's announcements will radically change the way that childcare subsidies are targeted. At the moment, just under half of total spending on childcare subsidies goes on universal programmes (i.e. the free 15 hours for all three- and four-year-olds). We estimate that the share is set to fall to about a quarter by 2027. Meanwhile, the share of childcare subsidy spending targeted at working families will more than double.
Impacts on parents' working patterns
- 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.
Impacts on childcare workforce
- Relaxing the staff-to-child ratios for two-year-olds (from four to five children per adult) could in a best-case scenario free up about 7,300 full-time equivalent childcare workers (10 per cent of the existing birth- to two-year-old workforce) if providers were able to fully implement the change. That would be enough to deliver about 50,000 new 30-hour places for two-year-olds (fewer for younger children, where ratios are tighter). If the OBR's (necessarily highly uncertain) prediction for the impact on parental labour supply is right, we calculate that England's childcare market could need about 65,000 new 30-hour places by 2027.
- The childcare sector has seen a long-term decline in the number of childminders, driven in most recent years by fewer entering the profession. The introduction of a £600 sign-up bonus for childminders (£1,200 for those joining childminding agencies) may help to recruit new childminders, offering families greater choice over their childcare. But this is unlikely to radically reshape the market: while childminders make up 55 per cent of providers, they supply just 17 per cent of places.
