Study finds free childcare reform has ‘little benefit’ to poorer families

The poorest families will see no direct benefit from the expansion of free childcare, a study has found, as the Government is accused of failing to prioritise inequalities in children’s development.

Changes announced by Jeremy Hunt in the March Budget represented an unprecedented expansion of free childcare, but the focus on parents who work rather than universal services or targeted support for low-income families means the biggest benefit will be felt in more affluent households, according to the Institute for Fiscal Studies (IFS).

Under the changes, by 2025 working families will able to access up to 30 hours a week of funded term-time care for all children from the age of nine months until they reach school age. Currently, funded 30-hour places are available only for children aged three and four in working families.

Meanwhile, the research found the share of disadvantaged two-year-olds eligible for a funded childcare place fell from nearly 40% in 2015 to just over a quarter in 2022­–23.

Budget 2023
Chancellor of the Exchequer Jeremy Hunt announced childcare changes in March (Stefan Rousseau/PA)

This is due to eligibility for two-year-olds being largely determined by whether families receive certain other benefits.

In 2015/16, these criteria covered nearly 40% of two-year-olds, but this has fallen significantly due to the transition to universal credit and the tightening of the “coverage and generosity” of working-age benefits, the study found.

Wage rises at a time when eligibility thresholds have remained fixed in cash terms have also had an impact, leading to just 27% of two-year-olds being eligible for the entitlement in 2022/23.

The IFS found the impact of the new Budget entitlements for families with a child aged nine months to two years differs dramatically across the income distribution.

Based on patterns of childcare use in 2019, a fifth of families earning less than £20,000 a year would be covered by the new entitlements compared with four-fifths of households with incomes above £45,000.

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.”

The IFS said that as younger children have been prioritised, average funding rates for two-year-olds have risen by a third to £7.95 an hour. This will leave resources well above current market prices for childcare, it added.

However, while funding for children aged three and four has risen this month by a lower 6%, the increase comes after a 17% fall in core funding in the decade up to 2022-23 once the rising cost of provision is taken into account.

Therefore, per-hour resources for three and four-year-olds will remain 11% lower on this measure in 2024–25 than in 2012–13.

The IFS said getting these funding rates right is crucial to ensuring plans are “deliverable and maintain the quality of childcare”, with the Government potentially paying for 80% of formal pre-school childcare in England once the new entitlements are rolled out in full.

Josh Hillman, director of education at the Nuffield Foundation, which funded the research, said: “This report demonstrates the huge scale of government funding required to deliver the new childcare entitlements.

“While the new money announced in the Budget is welcome, it is disappointing to see the analysis confirm a significant drop in the number of disadvantaged two-year-olds that will be eligible for free childcare.”

A Government spokesperson said: “As well as announcing the biggest ever expansion to free childcare for working parents, we have also almost doubled childcare support for the most financially vulnerable and by 2027/28 we expect to be spending £8 billion a year to help parents with affordable childcare.

“On top of this we’re investing more than £3.5 billion to help thousands, including parents, return to work and grow the economy.”