Richard Derecki: Childcare costs in London are increasing and the system looks past tweaking

Richard Derecki: Childcare costs in London are increasing and the system looks past tweaking

Pressure is again building on the government to address the “broken” childcare system. Recent reports from bodies as diverse as the Confederation of British Industry, the 4 in 10 the anti-poverty charity and Onward, the centre-right think tank, have all highlighted the impact of rising childcare costs on labour market participation rates and productivity.

High quality early years education is also hugely important to children’s long-term development. Those with education experiences supporting early cognitive, social and behavioural development and improving language skills are more likely to step smoothly into Reception and Year 1 and achieve better academic outcomes.

Yet access to affordable, high-quality provision is a long-standing  problem for many London parents and carers. Fees for childcare are eye-wateringly high – a full-time place for an under-three in inner London can cost up to £350 a week – and there is a lack of availability. Only 60 per cent of outer London boroughs surveyed by the charity Coram Family and Childcare last year said that there was sufficient supply in their area.

At the heart of the issue is underfunding of public provision. In England, the government funds three different sets of entitlements: for two-year-olds from less well-off families; for all three and four-yea- olds (but only for 15 hours a week); and for some three and four-year-olds an additional 15 hours depending on household income levels.

The free entitlements are complemented by subsidies through the tax system, including a fixed amount of tax-free childcare, though awareness of the scheme is poor and uptake low, and through working-age benefits, with parents on universal credit eligible to have 85 per cent of their childcare expenses reimbursed, up to a cap.

For anything else the parent or carer pays. If, for example, you have a three-year-old and you want to top up their time in nursery so you can work your 9-5, you are likely to have to pay around £140 a week on top of the 30 hours of free entitlement, assuming you get it – some £40 a week more than the average figure for the rest of England.

An early years national funding formula sets the hourly rates that each local authority is paid to deliver the universal and additional entitlements for three and four-year-olds (There is a separate one that sets the hourly funding rates for two-year-olds). The formula was tweaked over the summer and the latest uplifts were announced in December. While the overall amount will rise by 3.4 per cent, the average across London boroughs is just 1.8 per cent, the second lowest across the English regions.

The rate of inflation faced by providers is much higher than that. Recent work by the Institute for Fiscal Studies (IFS) highlights their bespoke “provider cost index” which is heavily weighted towards staffing, as staff account for three-quarters of childcare providers’ total costs: “As many staff earn at or around the minimum wage, a rising minimum wage significantly affects providers’ finances. Other major budget lines, such as energy and rent, are also rising quickly.” The IFS estimates that between the financial years 2021/22 and 2022/23 the prices facing childcare providers have have grown by 6.5 per cent and are set to grow by a further five per cent between 2023 and 2024.

The consequences of these cost rises are that a nursery might have to limit the number of free places it offers, reduce staffing levels or put up fees to cross-subsidise the free entitlement or both. Nearly three-quarters (72 per cent) of local authorities who responded to a recent national survey said that over the past year some or many of their local childcare providers have increased the prices they charge parents. Nearly half (48 per cent) reported that some or many providers have reduced their number of staff. And 43 per cent reported a reduction in the number of funded early education entitlement places available.

In the capital, both Sadiq Khan and the cross-party London Councils continue to highlight London’s high childcare costs and the impact they have on maternal employment rates, which are lower in London than the national average. But their scope for intervention is limited to lobbying the government for more funding and for unspent allowances to be devolved to local authorities to promote awareness campaigns, so that parents better understand the range of childcare support on offer.

Solutions will have to come from Whitehall. Yet there is a reluctance to be bold. Proposals from Liz Truss when she was briefly Prime Minister would have increased the free entitlement to 50 hours a week but also, controversially, relaxed staff-to-child ratios – an idea described by Neal Leitch, chief executive of the Early Years Alliance, as “disastrous”. Other proposals being mooted include handing a tax-break to parents rather than paying money to providers, and reducing or removing business rates from nursery providers.

A group of Conservative backbenchers is pressing the Chancellor for changes in his forthcoming budget. But tweaking the system further may no longer be tenable. As Megan Jarvie, Head of Coram Family and Childcare, said to a recent hearing of the education select committee, there needs to be “reform of the system entirely”. She advocates an entitlement to a child-care place for every child, where parents only pay what they can afford based on a sliding scale. This would give parents a choice about whether to work and how much working or staying at home. That really would be bold.

Richard Derecki is an economist and governance expert who has worked for the 10 Downing Street strategy unit and the Greater London Authority. Follow Richard on Twitter. Photograph from cover of Coram Family and Childcare Survey 2022.

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Categories: Analysis

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