Early years spending update: Budget reforms and beyond

Executive summary

The last 25 years has seen a transformation in how early years education and childcare is approached in England. The establishment and subsequent expansions of a ‘free entitlement’ to funded early education and childcare have seen early years spending quadruple over the last 25 years, and a major expansion of support announced at the March 2023 Budget will lead total spending to more than double. However, there are considerable challenges with the design, delivery and distributional consequences of these reforms. In this report, we examine how total spending on the early years system and on the free entitlement has changed; explore the impact of demographic changes; set out forecasts for how total spending and spending per hour might change going forward; and analyse some of the opportunities and challenges with the Budget reforms.

Key findings

1. Total spending on the early years education and childcare more than quadrupled between 2001–02 and 2018–19, when it reached £6.5 billion. Total spending has since fallen back to £5.4 billion, driven partly by lower real-terms spending on the free entitlement and partly by reductions in spending on tax reliefs and (especially) subsidies through the benefits system. Still, this represents a major increase in resources at a time when other stages of education have been squeezed.

2. From September 2025, all children in working families will get up to 30 hours of funded childcare a week from nine months old. These new entitlements will mean that free entitlement spending doubles between this year and 2026–27: the largest and fastest expansion on record. 3. Once childcare providers’ costs are considered, core funding per hour for 3- and 4- year-olds was more than 17% lower in 2022–23 than it had been a decade previously. Core funding per hour for 2-year-olds in 2022–23 was no higher in real terms than it was when the entitlement was introduced in 2015–16.

4. The Budget included new money to raise funding rates for existing entitlements. Even so, we estimate that core resources per hour for 3- and 4-year-olds in 2024–25 will be 11% below their level in 2012–13 once providers’ costs are taken into account. The government is instead prioritising younger children: for 2-year-olds, the average (cash terms) funding rate will reach £8.17 in that year, nearly £1 an hour higher in real terms than its previous peak in 2017–18.

5. By 2024–25, funding per hour for the under-2s and for 2-year-olds is set to be significantly above what the private market charges. This should help providers to deliver the new entitlements, and protect against providers opting out of the programme. However, the funding rate for 3- and 4-year-olds is much closer to existing market prices (and has been squeezed over the last decade).

6. 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 have all reduced eligibility for the existing 2-year-old offer. While it covered nearly 40% of children when it was introduced in 2015, in 2022 just over a quarter of children were eligible for the disadvantaged 2-year-old offer.

7. New entitlements announced in the budget continue the trend of increasingly targeting support towards children in working families, with the bottom 30% of the income distribution seeing almost no direct benefit from the proposals. While the new entitlements will directly benefit just over half of parents with a child aged between nine months and two years, that includes a fifth of families earning less than £20,000 a year and four-fifths of families with household incomes above £45,000.

8. Despite this clear focus on supporting parents to work, the new entitlements are expected to mostly shift who is paying for care. The Office for Budget Responsibility estimates that the reforms will draw the equivalent of an additional 65,000 parents into full-time work. Based on existing childcare use amongst parents with young children, we estimate that around five-sixths of spending on the new entitlements will pay for care that parents would have otherwise paid for themselves.

9. These changes in the early years landscape have taken place alongside large demographic shifts in the pre-school population. The number of 3- and 4-year-olds in England has fallen by 115,000, or 8%, since 2016–17. This is set to accelerate: there are likely to be 120,000 fewer 3- and 4-year-olds in 2025–26 than there are today. This could pose challenges to providers, who are funded on a per-capita basis.