First steps for the early years sector: Navigating the Budget’s childcare reforms

Significant announcements were made in the March Spring Budget with the aim to improve both the availability and affordability of childcare. Whilst the changes present opportunities for operators and investors in the sector, there are also some challenges that need to be considered.

The affordability of childcare has been a significant issue for many families across the UK. The availability of childcare options in some areas, coupled with high costs in a time of economic uncertainty has had a negative impact on the number of parents being able to work.

Two months on from the announcement, we recap what the childcare reforms were together with the initial responses we are hearing from discussions with our clients and other operators.

Start-up grants for new childminders

Start-up grants of £600 are to be paid to new childminders who register with Ofsted, with £1,200 to be paid to those that register with a childminder agency.

Staff recruitment and retention continue to present a major challenge to operators. There is some concern that the incentive for new childminders is going to exacerbate this issue, both in terms of recruitment of new practitioners and through existing practitioners leaving the profession to set up their own childminding business.

Some operators are reviewing benefits offered to staff, as well as improving the general working environment to assist with staff retention. This is difficult, however, at a time when inflation is high, and profit margins are already under pressure due to increasing overheads.

Increase in hourly rates paid to operators and increase in free childcare offered to parents

The Government will increase the hourly rate paid to operators to deliver existing free hours offers for 3- and 4-year-olds. £204 million of additional funding is to be provided during 2023/34, increasing to £288 million by 2024/25.

Working parents in England will also have access to 30 hours of free childcare per week for 38 weeks of the year, from when their child is nine months old to when they start school. This will be rolled out in stages from April 2024 and is expected to be fully implemented by September 2025.

Whilst additional funding is welcomed by many, particularly given the high inflationary environment we currently live in, the views of operators we speak with is that the amount proposed is significantly below what is required to fund the existing shortfall for 3- and 4-year-olds in order to provide stability for operators. There has been a lack of clarity in terms of what the funding increase will equate to on an hourly basis, which leaves operators unable to plan ahead for these changes.

Many operators currently rely on the fees from younger children in order to subsidise current funding shortfalls for 3- and 4-year-olds. There is concern that extending free hours to children from nine months old without careful consideration for adequate investment is a recipe for disaster. The reality is that whilst these hours are perceived to be ‘free’ to parents, operators are not permitted to charge a top-up fee to cover the shortfall between the funded hourly rates received from local authorities and the standard hourly rates charged. To help cover the shortfall in funding, some operators are now charging parents for extra services covering consumables, food, and additional sessions during school holidays.

Whilst this announcement is likely to increase demand across the early years sector, it remains unclear as to how supply can keep pace, particularly given the number of nursery closures and early years educators leaving the sector.  Some feel that many parents of younger children expecting funded places to be available may be left disappointed unless sufficient funding and the appropriate infrastructure is in place by the time the policy is rolled out. The implementation of start-up grants to childminders will also have a negative impact on this.

Staff-to-child ratios

The Government will change the staff-to-child ratios for 2-year-olds from 1:4 to 1:5 (in line with Scotland). This change is optional, with no obligation for operators to adopt the change.

The general feeling amongst operators with this proposal is that whilst it may assist with controlling costs for operators, it presents an inherent risk in the overall quality of the service provided. While there is a need for childcare services to be affordable, safeguarding is still the ultimate priority for parents and providers.

The early years sector does not just provide childcare, it provides early education at a vital time in the development of a child. Many feel that further investment is required to ensure high quality provision (both care and education) and to further enhance the sector as a profession, which in turn will encourage those leaving education to pursue a career in the early years sector, thus assisting with the current recruitment and retention challenges faced.

Upfront payments to parents on universal credit

For parents on universal credit, childcare support will be paid upfront rather than in arrears when they are moving into work or increasing their hours. £951 will be paid for one child and £1,630 for two children.

Increasing the funding available and timing of payments to low-income families is a positive step to allow parents of young children to get back into work. This will assist with occupancy levels for operators as well as the wider benefits to the economy.

Final thoughts

The Government claims that these reforms will positively impact the early years market by increasing the demand for services, reducing the financial burden on low-income families, and improving the availability of early years provision.  However, questions remain about the feasibility and effectiveness of these reforms, particularly in relation to the amount of funding and timing of implementation.

If you are an operator or investor in the early years sector seeking expert advice, please contact a member of our team who would be delighted to explore how we could support you with achieving your business goals.

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