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How early years provision is funded

The majority of Government funding for early years providers in England is delivered via three childcare entitlements:

  • 15 hours universal entitlement for all three and four-year-olds.
  • 15 hours entitlement for disadvantaged two-year-olds.
  • Extended 30 hours entitlement for three and four-years-olds of eligible working parents.

Funding for the entitlements is included in the Early Years Block of each local authority’s Dedicated Schools Grant (DSG). Additional Government funding for disadvantaged children (Early Years Pupil Premium) and children with additional needs (Disability Access Fund) is also included in the Early Years Block, along with supplementary funding for maintained nursery schools. In 2021/22, the early years block is worth around £3.57 billion.

Early Years National Funding Formula

Funding for the 15 and 30 hours entitlements is determined using the early years national funding formula (EYNFF). While the EYNFF determines local authorities’ funding allocations, each authority decides the hourly rate paid to providers in their area. There are several requirements authorities must follow when allocating funding to providers.

The Government is making changes to the EYNFF for 2023/24 which will result in changes to local authorities’ funding rates. Year-to-year protections will apply, meaning every local authority will gain at least 1%. There will also be a gains cap of 4.9%.

Funding for maintained nursery schools

Since the introduction of the EYNFF in 2017/18 the Government has provided additional funding for maintained nursery schools (MNS) in recognition of the higher costs they face. The Government is making changes to the way this supplementary funding for MNS is distributed from 2023/24. An additional £10 million of supplementary funding will also be provided.

Further information on funding provided outside of the EYNFF, including for disadvantaged two-year-olds and in response to the Covid-19 pandemic, is provided in section four of this briefing.

Commentary on funding levels

Whether early years funding is high enough has been the subject of debate since well before the Covid-19 pandemic. The Institute for Fiscal Studies (IFS) has said this is “an extremely difficult question to answer, not least because there are different definitions of ‘high enough’.”

Department for Education analysis published in April 2022 suggested the mean income-to-cost-ratio (total weekly income divided by total weekly cost) for early years providers was 1.25 in 2021. The median income-to-cost ratio was 0.96, meaning half of providers were at or around the breakeven point.

In its 2022 annual report on education spending in England, the IFS suggested that prices faced by early years providers had increased more quickly than those faced by households or the economy as a whole. It added that higher than expected inflation was “set to undo” recent gains in funding.

Based on the costs facing childcare providers, the report estimated funding for the early education entitlements will fall by 9% in real terms between 2021/22 and 2024/25. While this will be partly offset by falls in the population of young children, the report estimated core hourly funding for three and four-year-olds will be 14p lower in real terms by 2024/25.

Childcare sufficiency

It has been suggested that financial pressures are forcing some early years providers to close permanently and concerns have been raised about the impact of this on childcare sufficiency.

The number of registered early years providers has fallen steadily since 2015 and there was a net overall decrease of around 5,410 providers between
31 August 2021 and 31 August 2022
. This was the largest annual decrease since 2015/16, most of which was due to a fall in the number of childminders.

Ofsted has said the decrease in the number of childcare providers may “in part be caused by the considerable decrease in the birth rate. There are also more parents working from home, which may reduce demand for childcare places.” The Government has said the number of places offered by providers has remained broadly stable and it will support any local authorities experiencing sufficiency issues.

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