Parents could face childcare hike as providers set to struggle further

A new report from the Institute for Fiscal Studies shows costs to childcare providers are set to rise faster than inflation.

Close up of child's hands playing with colorful plastic bricks and red motocicle at the table. Toddler having fun and building out of bright constructor bricks. Early years childcare


Parents could face higher childcare fees as providers are predicted to see a steep rise in costs in the coming years, with spending on ‘free’ entitlements predicted to fall by 8%, according to a new report.

The report from the Institute for Fiscal Studies comes amid a rise in childcare provider closures during the pandemic and worries for parents about childcare availability.

The IFS says spending on childcare in England has risen significantly over the past 20 years as more parents have remained in the workforce, but all of this increase is due to the expansion of ‘free’ childcare for three and four year olds and to disadvantaged two year olds, while benefits entitlements have seen a steep fall.

The report finds spending on early years in England has risen from around £1.5 billion in 2001–02 to more than £5.3 billion last year, with the budget for ‘free’ entitlements rising from £1.7 billion in 2009–10 to over £4 billion last year. This is at a time of cuts in other education stages over recent years, although spending on childcare is significantly lower than spending on schools at just 0.1% of GDP.

In September 2010, the Department for Education introduced an entitlement to 15 hours of free childcare per week for all three and four year olds in England. In 2013, it extended this to include two year olds from disadvantaged families. In 2017 the 15 hours for three and four year olds was extended to 30 hours for some working parents. At the same time, the number of working mums in the workforce has risen, including the number working full time. In 2019 the employment rate for mothers in England (74.8%) was greater than for women without dependent children (70.8%). In 2000 only 66.2% of mothers in the UK were in work. More than half (55.1%) of families with one child had both parents working full time.

Despite the increase in spending on ‘free’ childcare, childcare providers have long complained that the subsidy given by the government for places does not match the actual cost, meaning they are losing money. The IFS says childcare providers have also been hit by rises in other costs, such as staffing due to the increase in the minimum wage. Last year (2021–22), it says, prices facing childcare providers were 11% higher than before the pandemic. This compares to a 9% rise in the economy as a whole.  It predicts this problem is set to grow, estimating that providers’ costs will grow by 16% between 2021–22 and 2024–25 – higher than predicted inflation.

Higher inflation has also affected the funding for the ‘free’ entitlement, which the IFS says will be 8% lower in 2024–25 than it was in 2021–22. While falling numbers of two to four year olds could offset some of these costs, the IFS says funding per hour, currently £5.06 an hour for three and four year olds, will fall by 10p in real terms by 2024-25.

Moreover, childcare support through the benefits system has fallen significantly, down from £1.8 billion in 2009–10 to £640 million in 2021–22, partly due to a sharp fall in spending during the pandemic, but mainly due to benefits changes since 2009 predates the pandemic.

The report also comments on the tax-free childcare scheme, saying spending on tax relief [previously through childcare voucher schemes] has risen from £510 million in 2009–10 to just over £1 billion the year before the pandemic. However, spending fell sharply during the pandemic years and has fallen well short of government plans for spending on the new system of tax-free childcare. The IFS states: “It is not wholly clear why families are missing out on support through this new system.”

Elaine Drayton, a Research Economist at IFS and an author of the report, said: “Over the past decade or so, the government has prioritised the early years above other stages of education, rolling out new childcare entitlements for disadvantaged two year olds and for three and four year olds in working families. This has meant increasing spending on free childcare hours while other public services have seen cuts.

“But early years providers are facing rapidly rising costs that are eroding the value of their budgets. Childcare providers’ costs had already been rising faster than economy-wide inflation over the last few years, but they face an even steeper rise in the coming years. That will leave government funding for the free childcare programme much lower than had been intended when the budget was last set in 2021.”

Calling for ‘realistic funding’ of the childcare sector, Neil Leitch, CEO of the Early Years Alliance, said: “While the news that early years funding is failing to keep up with inflation will come as little surprise to anyone in the sector, the news that real-terms funding for the so-called ‘free childcare’ offers is set to fall by 8% over the next two years is still deeply worrying.
“Years of inadequate investment from government has meant that many nurseries, pre-schools and childminders are already teetering on the edge of survival, with 4,000 settings permanently closing in the last year alone. As such, it is almost impossible to imagine how the sector will be able to survive with such a significant real-terms funding drop.”  

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