Report highlights childcare funding risk

Some childcare providers could close as a result of the coronavirus pandemic and ongoing financial pressures, meaning a shortage of places once demand returns to “normal” levels, according to a new study.

The study, by researchers at the Institute for Fiscal Studies, the University of Birmingham, Frontier Economics, Coram Family and Childcare and the University of Surrey, calculates that a total loss of income from parent fees as a result of Covid would mean a quarter of private-sector nurseries were at risk of running a significant deficit during lockdown, with less than £4 of income for every £5 of costs. It says that is more than double the number which were running a significant deficit prior to the pandemic, when childcare providers’ finances were already weak and is despite government support through continued public funding and the substantial furlough and self-employment schemes.

While childcare settings were allowed to open to all children from the start of June, the IFS notes that by the start of summer holidays demand for childcare places remained 70% below pre-crisis levels.  The report sets out recommendations for effective government intervention, but says raising the ‘free’ entitlement may not be the best way to help childcare providers, since those that rely most heavily on this are less badly affected than those more reliant on parent fees.

The research also finds that:

• Continued funding for the free entitlement for two, three and four year olds during the lockdown means that providers that rely mostly on public funding have so far seen their income largely protected. Funding will be reassessed in 2021 based on January pupil numbers, risking a loss of capacity if there is still less demand than in normal times.

• For providers with income from parent fees, support through the furlough scheme and self-employment grants was a significant help but provided far from full protection, says the study. It estimates that the median furlough payment was worth 55p for every £1 of lost fee income, and self-employment grants covered 64% of baseline fee income at the median.

• Many childminders are likely to have been hard-hit by falls in their income from parent fees. The report says that, even if all childminders received self-employment grants, the total loss of parent fees could see an additional almost 30% of childminders now earning less than £4 of income for every £5 of costs. This could mean more withdraw from offering childcare services.

• Even by mid-July, after lockdown ended, childcare use was only around 30% of its pre-crisis level. The report estimates that, for every 5-percentage point drop in fee income from pre-crisis levels, an additional 3-4% of settings risk tipping into significant deficit.

Dr Claire Crawford, Reader in Economics at the University of Birmingham and Research Fellow at the IFS, said: “Even before the crisis, almost three in ten childcare settings were running a significant deficit, and there was an ongoing debate about whether the funding rate for free entitlement places was sufficient to cover providers’ costs. By squeezing income from parent fees, Covid-19 has magnified these concerns. However, our research shows that the providers most at risk of going into significant deficit – and hence potentially most at risk of exiting the market – are those that do not rely on public funding. While the government might have good reason to prioritise supporting providers of free childcare hours, doing so may not be the best way to secure the capacity provided by otherwise viable businesses that tipped into a temporary deficit as a result of the pandemic.”

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