‘Many of the poorest won’t benefit from childcare extension’

The poorest third of families will see almost no direct benefit from the extension of free childcare because funding is targeted at working parents, according to an analysis by the Institute for Fiscal Studies [IFS].

The report calculates the extension will benefit just a fifth of families earning less than £20,000 a year and four-fifths of families with household incomes above £45,000 and adds that it estimates around five-sixths of spending on the new entitlements will pay for care that parents would have otherwise paid for themselves.

In the March 2023 Budget, the government announced a bit expansion of subsidised childcare for working parents. By September 2025, the programme will offer up to 30 hours a week of funded term-time care to all children in working families from the age of nine months until the start of school.

Currently, 30-hour funded places are only available to three and four year olds in working families and some disadvantaged two year olds, although the number of two year olds who are eligible has fallen from nearly 40% in 2015 to just over a quarter in 2022-23. This drop is due to the transition from legacy benefits to universal credit, a squeeze on generosity in the benefits system and a cash-terms freeze in the maximum allowable income for eligibility, according to the IFS.

The IFS report, supported by the Nuffield Foundation, says the extension continues the trend towards prioritising childcare support towards parents who work, rather than universal services or targeted early education for low-income families, meaning many of the poorest parents will not see any benefit.

The report also highlights the importance of getting the funding rates right for these major new entitlements given that, once they are fully rolled out, the government could be paying for 80% of formal pre-school childcare in England. At the start of this month, the government increased funding rates for existing childcare places; hourly rates are set to rise again in 2024. The research finds that:

• Younger children have been prioritised for bigger funding increases: 2-year-olds have seen their funding rate rise by a third, from an average of £6.00 an hour to £7.95. The analysis shows that, even after providers’ rising costs are taken into account, this will leave resources around £1 an hour higher in real terms than their previous peak – and well above current market prices for childcare.
• Meanwhile, funding for three and four year olds has risen by 6%. But the rises come on the back of a 17% fall in core funding in the decade leading up to 2022–23. Even with the rate increases, per-hour resources for three and four year olds will still be 11% lower on this measure in 2024–25 than in 2012–13, says the IFS.

Another issue the report highlights is longer term demographic changes. It says the extension of subsidised early years care is taking place alongside large demographic shifts in the pre-school population with implications for childcare providers. It points out that the number of three and four year olds in England has fallen by 115,000, or 8%, since 2016–17. It estimates that there are likely to be 120,000 fewer three and three year olds in 2025–26 than there are today. “This could pose challenges to providers, who are funded on a per-capita basis,” it states.

Christine Farquharson, IFS Associate Director and an author of the report, said: “Spending on the free entitlement is now four times higher than it was two decades ago. With the new childcare entitlements announced in the Budget, it’s now set to double again over just three years. But these new entitlements are another big step towards an early years system focused on helping parents to work – with much less to say about reducing inequalities in children’s development.”

Neil Leitch, CEO of the Early Years Alliance, said:“There is a wealth of research showing that children from poorer backgrounds benefit the most from quality early education and care – and yet, as this report rightly highlights, the upcoming 30-hour expansion is set to exclude these children almost entirely.

“For all ministers’ talk of the need to ‘close the gap’ between disadvantaged children and their peers as early as possible, the government has made it very clear that this policy was created to encourage parents to return to work, rather than ensuring that all children can access a high-quality early education.

“Let’s be clear: early years provision is more than just childcare. It is vital education, delivered at the most crucial period of a child’s learning and development.

“In no other area of education would we accept the idea of children’s fundamental access to education being determined by their parents’ earnings – so why is it acceptable in the early years?”

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