The big regional winner from the proposals will be outer London with a rise in cash funding of almost 20 per cent. Other regions will see a more modest rise in funding (figure 2). Only inner London will see a fall in cash funding of -2.5 per cent. Within these regional changes, individual local authorities will see dramatically different changes to their budgets. Yorkshire and Humberside will see little change in funding overall but dramatic changes to budgets among individual local authorities. For example, Leeds would receive a cash increase of 20 per cent whilst nearby Bradford would see funding fall by 10 per cent.

Figure 2: Change in funding by region
Source: Family and Childcare Trust calculations using Department for Education (2016) Early Years Block National Funding Formula - Illustrative Impact on LAs

Most early years providers would also benefit from the proposals. Private and voluntary providers in many areas would receive a ‘double dividend’ as the local authority receives an increase in funding and the introduction of a universal funding formula means that PVI settings receive an increased share of funding. Overall, the Department estimates that 88 per cent of PVI providers and 78 per cent of maintained providers will be better off in cash terms once the changes are fully implemented. However, it is worth noting that a small number of PVI and maintained settings will face significant funding reductions. Figure 3 shows the estimated gain or loss for PVI and maintained settings in each local authority once transitional protections are removed.

Figure 3: Percentage change in cash funding per hour for PVI and nursery class settings by local authority
Source: Family and Childcare Trust calculations using Department for Education (2016) Illustrative LA allocations under early years national funding formula and Department for Education (2015) Early Years Funding Tool 2015/16

Who will lose out?

The group of providers most likely to lose funding will be maintained services. As figure 4 shows, a small proportion of local authorities offer rates that favour PVI providers whilst a majority currently favour maintained settings. A universal base rate means that these imbalances would be largely smoothed out but this will result in sharp funding cuts for some maintained providers.

Children from disadvantaged backgrounds are more likely to attend free early education in a maintained setting, so these settings are still likely to receive a greater share of funding overall through the additional deprivation supplement. However, the ten per cent cap on supplements is lower than the current value of supplements in many areas (in 2015/16 the average value of the deprivation supplement was 15 per cent of the base rate) so maintained settings would benefit less from this additional funding than in the past.

Overall, we estimate that up to £60 million will be ‘transferred’ from maintained to PVI providers as a result of the universal base rate. Around a fifth of maintain providers would lose funding – many significantly – but the majority of both maintained and PVI providers would gain funding; however, maintained providers would receive a lower share of the pot.

Figure 4: Spending imbalance between maintained and PVI settings by local authority (positive figures favour maintained settings)
Source: Department for Education (2015) Early Years Funding Tool 2015/16

Local authorities may also lose funding as a result of the five per cent limit on funding that they can retain. Figure 5 sets out what percentage of the early years block of the DSG local authorities retained in 2015/16. We estimate that 75 local authorities would lose up to £83 million in total. In addition to administration costs and support for providers, this funding may be used for a range of purposes, such as targeted support for maintained and voluntary settings, support for families and children at risk, quality incentives and to develop free places where there are shortages.

Figure 5: Percentage of early years block of DSG centrally retained by local authorities
Source: Department for Education (2015) Early Years Funding Tool 2015/16

The region that will clearly lose as a result of the proposals is inner London, where 12 out of 14 local authorities will lose an average of five per cent of their funding (Greenwich and Lewisham are the exception and will gain 27 and 25 per cent respectively, illustrating how disparate settlements for neighbouring local authorities will be). Inner London already has serious sufficiency problems, with take-up of the two and three year old offer of 53 and 83 per cent compared to 68 and 94 per cent in England.

Is this the right approach?

Early years funding had become so distorted that reform to put funding on a more rational basis will inevitably create disruption. There are a number of positive aspects to the Government’s proposals, including a significant increase in funding for most areas and welcome steps to invest in inclusion. However, the approach set out carries some significant risks.

The proposed removal of the minimum funding guarantee could mean steep declines in funding for many providers. Consequences could include a declining number of free places, lower quality as pressures on wages bite and even in some cases service closures. Of course, the opposite is also true in many of those areas that gain funding, where providers will have new opportunities to invest in services.

As a whole, the proposals are not progressive in targeting the most disadvantaged children. Overall, 63 per cent of children in the most deprived decile attend free early education in a maintained setting compared to 17 per cent in the least deprived decile. Redistributing funding from maintained providers to PVI providers must therefore be considered carefully. It would be better as far as possible to raise funding for PVI settings to the level of their maintained equivalents rather than redistribute funding from one type of setting to another.

There are also risks in equalising funding between PVI and maintained settings without equalising standards. Maintained providers must adhere to the school admission code, which means they must prioritise those with the highest needs, implement more stringent inclusion policies for children with SEND and meet higher staff qualification requirements. All of these duties carry additional costs, but it is not clear how these costs have informed funding reform.

The opportunity to raise quality in PVI settings through new investment is also not mentioned in the consultation; for example, a graduate funding supplement is not on the list of allowable hourly supplements. There are large variations across local authority areas in the proportion of children receiving graduate-led care and in the proportion of settings with ‘Good’ or ‘Outstanding’ Ofsted grades. Rising funding is an opportunity to raise standards where quality falls short that should not be missed.

The cap on early years DSG funding that can be retained by local authorities would compound funding challenges for local authorities already managing steep budget reductions (in fact, local authorities are currently spending £233 million more on free early education than the Government allocates). Centrally retained funding is often used to support local early intervention strategies, increase the proportion of qualified staff and graduates in settings and develop new places to address gaps in provision. The cap would put at risk the important strategic role local authorities play in improving quality and children’s outcomes, particularly for those who are otherwise poorly served by the local early years market.

Finally, no consideration has been given in the new funding arrangements to the funding needed to address gaps in sufficiency, either in the number of free childcare places or the quality of places offered. Figure 6 shows the change in funding for each local authority along with take-up of the free offer. As the chart indicates, there is no correlation between sufficiency problems and the proposed redistribution of funding.

Figure 6: Indicative allocations by local authority and childcare sufficiency
Source: Department for Education (2016) Education provision: children under 5 years of age, January 2016; Department for Education (2016) Early Years Block National Funding Formula - Illustrative Impact on LAs

How can the Government get it right?

There are good reasons to be cautious about the long-term impact of the Government’s proposals. The key question for providers will be whether funding rises in real terms once new cost pressures such as the National Living Wage, pension auto-enrolment and the impact of the 30 hour offer are taken into account. The picture for many providers could be less positive than the headline hourly allocations suggest.

Second, the Government has not proposed any structural changes that will ensure future allocations keep pace with changes in provider costs. It is to be expected that the early years budget will be settled each spending review period. However, the funding settlement for the early years must be informed by a credible assessment of the cost of delivering childcare, particularly as quality standards rise and demand for flexible services increases.

The Family and Childcare Trust has recommended that local authorities are given a statutory responsibility to collect data on the cost of delivering childcare and the Government in turn establishes an independent advisory body to make recommendations on funding allocations. This would help to restore trust between providers and the Government and put funding on a sustainable footing in future.

In the short term, we think there are five steps the Department for Education should take to manage early years funding reform in a way that minimises unnecessary disruption and works for as many providers and ultimately families as possible:The Department should slow down the speed of reform and target investment at those areas and providers with the greatest quality and sufficiency challenges. There is no reason to impose deep funding cuts in some areas and extraordinary gains in others over a two year period. This will lead on one hand to unnecessary disruption in those areas losing funding and on the other to waste as other areas receive a windfall.

1. The Department should slow down the speed of reform and target investment at those areas and providers with the greatest quality and sufficiency challenges. There is no reason to impose deep funding cuts in some areas and extraordinary gains in others over a two year period. This will lead on one hand to unnecessary disruption in those areas losing funding and on the other to waste as other areas receive a windfall. The Department should extend the transitional period and implement a ‘pace of change’ policy by retaining the 1.5 per cent minimum funding guarantee so that the sustainability of services is not threatened and funding increases can be invested sensibly. A proportion of funding should also be linked to the sufficiency challenges each local authority faces and could be conditional on a credible sufficiency action plan.
2. Local authorities must retain the flexibility to invest early years funding to meet local priorities through centrally retained funding and well-designed supplements. The consequence of the proposed approach will be that it is much more difficult for local authorities to invest in early intervention to benefit the most disadvantaged children. A balance between ensuring funding reaches providers and enabling early intervention can be achieved by allowing local authorities flexibility alongside clear guidance on acceptable uses of supplements and centrally retained spending.
3. Equal funding for PVI and maintained settings should mean equalising quality, access and inclusion requirements. If funding is not linked to higher standards, the proposals could simply lead to a perverse outcome where new funding is pumped into free provision with no meaningful impact on the quality of services or outcomes for children.
4. While additional support for inclusion is welcome, the requirement for local authorities to operate an inclusion fund should be put on a statutory basis to ensure a concrete improvement in practice. Key principles can be set out in the annual statutory guidance for early years providers. This would not constrain local flexibility but would mean that both early years providers and parents know what to expect in future.
5. Finally, the Government and Greater London Authority must work together to find solutions for inner London. Many areas in London stand to lose out even as children are already being denied their entitlement to free early education. In this context, it is hard to argue that inner London boroughs are over-funded. However, funding alone is not the answer in London, where shortages of appropriate buildings will make delivery difficult without creative solutions such as freeing up publicly owned buildings for nursery provision.