How could the early years budget be better targeted to reduce inequality?

High-quality early education boosts children’s development, family income and national productivity. But current public spending on it in the UK is not targeted towards the most disadvantaged families. Policies to reshape early years investment could help to reduce, rather than widen, inequalities.

In the spring 2023 budget, the chancellor announced an expansion of funded early education entitlements to children in working families in England from the age of nine months. The rollout started in April this year.

This decision more than doubled expected spending on early education entitlements over the next five years. The best available evidence suggests that increasing access to affordable high-quality early education provides a ‘triple whammy’ of benefits: improving children’s development; increasing family income; and boosting productivity. Who could argue with that?

In reality, the way that the policy was targeted – with the aim squarely on the second (and third) of these potential benefits, rather than the first – means that this substantial investment is likely to increase, rather than decrease, the very large differences in children’s skills that exist even before they start school.

Many more two-year-olds from higher earning families than lower earning ones will benefit from the new entitlements, with non-working families not benefitting at all, as shown in Figure 1 from the Institute for Fiscal Studies (IFS).

While there are other childcare subsidy programmes targeted towards more disadvantaged families – including the funded entitlements for disadvantaged two-year-olds shown in Figure 1, and childcare support available via universal credit – what they provide is lower, either in terms of the total number of funded hours available or the subsidy rate payable.

Further, the sheer scale of the new entitlements may risk crowding out families who are not able to pay for additional hours.

Figure 1: Eligibility for the free entitlement among two-year-olds, by equivalised household earnings

Source: IFS, 2024
Note: The IFS calculations use data from the Labour Force Survey (Q3 2021 to Q2 2023). The far-left column covers the 15% of two-year-olds living in households where no parent is in paid work. The rest of the population is divided into quintiles based on gross household earnings, equivalised based on household composition.

High-quality early education benefits children as well as parents – and often benefits those from more disadvantaged families the most. Indeed, the Department for Education’s value for money analysis suggests that they expect nearly two-thirds of the benefits of the policy to arise from the children who access the subsidised care, rather than the parents helped into work.

The policy – which subsidises the cost of attendance only for children in working families – therefore excludes precisely those who might benefit the most from high-quality early education.

How could an incoming government repurpose the now substantial early years budget to reduce the risk of increasing inequalities?

It could follow in the footsteps of policy-makers in Ireland and focus on delivering a single progressive childcare subsidy.

Bringing together subsidies that are currently spread across universal credit, tax-free childcare and the funded early education entitlements so as to offer a single progressive subsidy schedule, available to all families, would have the dual benefit of simplifying the system and making it more progressive. Such a policy would offer children from all families access to at least some subsidised care, with the size of the per hour subsidy decreasing as family income rises.

The government could also take steps to address more directly some of the other challenges facing the childcare sector – notably the ability to deliver high-quality provision while struggling to attract and retain staff.

Ireland has tried to tackle these issues by offering additional funding to providers that sign up to a set of conditions designed to improve the quality of provision, pay higher wages and not increase fees in response to rising subsidies.

Given that the government will control the price of 80% of all pre-school childcare in England once the rollout of the new entitlements is complete, it may not be unreasonable to place similar conditions on the largely private and voluntary sector providers delivering the new entitlements. While the Irish reform is still in its infancy, there are some early indications of success, and the UK would do well to keep a close eye on its progress.

The new early education entitlements in England are highly likely to reduce childcare costs for many families. They are also expected to increase the number of parents – primarily mothers – in work, even if not substantially.

But on their own, they cannot solve many of the other challenges facing the sector, and they may even exacerbate them. Worryingly, they may widen inequalities in access to high-quality formal education and hence the pre-school development of children from different backgrounds.

Reducing subsidies for higher-income families and using the savings to increase and simplify the subsidies for lower-income families, while also providing conditional funding to childcare providers, could have achieved many of the same benefits but in a more progressive way. Such an approach would help to reduce, rather than widen, inequalities in children’s development.