Guidance

Early years funded entitlement cost changes forecasts, England: spending round 2021 to 2022

Updated 25 November 2021

This guidance was withdrawn on 28 December 2023

This has been withdrawn as it is out of date.

Find the latest guidance on early years funding on GOV.UK.

Applies to England

1. Background

1.1 Funding of the early years free childcare entitlements

The Department for Education (DfE) is responsible for the funding of three major early education entitlements for children prior to reception year entry. The three entitlements offer government funded childcare for 38 weeks a year to parents of pre-reception aged children. These entitlements comprise:

• 15 hours a week for disadvantaged 2-year-olds, based on meeting eligibility criteria
• universal 15 hours for all 3 to 4-year-olds
• an additional 15 hours (30 hours total) for 3 to 4-year-olds whose parents are in employment, and meet other conditions of eligibility

Funding for the universal and additional entitlements for 3 to 4-year-olds is distributed via the early years national funding formula (EYNFF). There is a separate formula that sets the hourly funding rates for 2-year-olds. You can read further guidance on early years national funding formula, funding rates and guidance.

The Coronavirus (COVID-19) pandemic

For the purpose of this forecast of changes in the cost of providing entitlement funded childcare hours in future years, no attempt has been made to account for the impact of the coronavirus (COVID-19) pandemic. This is due to the inherent uncertainty of the situation, of its impact on early years providers’ costs, and of how long those impacts will occur for.

1.2 The DfE early years cost pressures model

As the major purchaser in the childcare market, the government seeks to ensure that all the early years entitlements are appropriately funded and that the market is sustainable for delivery of the childcare entitlements. To inform decisions on the rate at which early years providers are funded for delivering entitlements, DfE has developed an analytical model using various data inputs. The main purpose of this model is to forecast the rate at which the average cost of delivering childcare entitlements is going to change.

The model uses underlying data from the survey of childcare and early years providers technical report (SCEYP), a large-scale and robust survey on the childcare market in England, sampling over 10,000 providers.

2. Estimating entitlement delivery cost in 2019 to 2020

To accurately forecast the change in the cost of delivering an hour of funded entitlement in future years, the model first calculates the average delivery cost at the most recent point where sufficient data is available. In the model used in spending review 2020 (SR20), underlying data from the 2019 SCEYP formed much of the base for understanding provider cost (much of the data used was though secondary analysis of the 2019 SCEYP and remains unpublished). This is the most recent version of the survey as of the SR20 conclusion and uses data collected before the coronavirus (COVID-19) pandemic.

The model uses underlying 2019 SCEYP data for:

• average number of available places per setting
• occupancy rates for each day of the week by age
• distribution of children at a provider by age (proportion of attendance by age of child)
• occupancy rates by age (percentage of full capacity)
• average staff-to-child ratios by age
• distribution of staff by qualification type
• hourly staff pay by qualification type
• non-labour costs (e.g rent/mortgage and building maintenance)

Additional model inputs include:

• national insurance rates and thresholds
• national legal pension requirements and thresholds
• assumptions of national living wage and national minimum wage rate
• GDP deflators from OBR fiscal sustainability report July 2020, chapter 3, table 3.31
• distribution of entitlement hours by age and provider type
• additional labour costs (e.g pension and sick pay)
• minimum staff-to-child ratios

Using these inputs, the model estimates the annual cost of delivering funded hours of entitlement childcare broken down by provider type (private group based, voluntary group based, nursery classes, maintained nursery schools and childminders). This is then divided by the total number of entitlement hours delivered in a year for each provider type to estimate the average hourly entitlement delivery cost in the 2019 to 2020 financial year. There are separate calculations, for (i) 2-year-old and (ii) 3 to 4-year-old provision.

3. Calculation of future cost pressures

Early years future cost pressures are the main output from the DfE cost pressures model. These are estimated forecasts for the rate at which the cost of delivering a funded entitlement hour changes in future years. Estimates of cost pressures for both 3 to 4-year-olds and 2-year-olds are shown below for the SR20 financial period of 2021 to 2022.

Percentage change in hourly entitlement delivery cost by child age

Age group	Percentage change in hourly entitlement delivery cost from 2020 to 2021 to 2021 to 2022
3 to 4-year-olds	+0.53%
2-year-olds	+0.73%

This displays that the cost of delivering a funded entitlement hour is forecast to rise by +0.53% and +0.73% for 3 to 4-year-olds and 2-year-olds respectively between 2020 to 2021 and 2021 to 2022. For the purpose of forecasting cost pressures in 2021 to 2022, the impact of the coronavirus (COVID-19) pandemic was not accounted for in the modelling work because it was not possible to accurately forecast the timing and severity of any future outbreaks. It is worth noting that the 2-year-old cost pressure is greater than the 3 to 4-year-old cost pressure. This is primarily due to the different staff-to-child ratio requirements for 2-year-olds, meaning they have a higher proportion of staff costs which are forecast to increase at a faster rate than non-staff costs. In addition, according to the 2019 SCEYP a much greater proportion of 2-year-olds than 3 to 4-year-olds attend group-based providers, which are forecast to face greater increases in cost than other provider types in future years, largely due to having a higher proportion of staff affected by the national living wage or national minimum wage.

In order to generate the cost pressures presented in the table, costs are split into two types; staff costs and non-staff costs.

3.1 Staff costs

Staff costs consist of:

• salary costs
• training costs
• national insurance
• pension costs

Non-national living wage

The DfE cost pressures model assumes that the earnings of staff increase with GDP deflators, other than those directly affected by the national living wage or national minimum wage (because of their income being higher). All staff wages are uplifted by GDP deflators as the broadest measure of inflation in the domestic economy. GDP deflators from the office for budget responsibilities (OBR) fiscal sustainability report were used. For more information on GDP deflators view the HMT guidance.

National living wage

As a relatively low paying sector, childcare providers are disproportionately affected by increases in the national living wage compared with other sectors of the economy. The social mobility commission found that the average hourly wage across the early years sector was £7.42 an hour, compared with £11.37 for the overall female workforce and £12.57 for the total working population using the 2018 annual population survey.

The DfE cost pressures model assumes that all staff are paid at least the national living wage and national minimum wage or above based on age eligibility in accordance with the legal requirement. Once the GDP deflator staff pay uplift in future years is accounted for, those staff on wages below the national living wage or national minimum wage have their pay uplifted to that of the legal national living wage or national minimum wage rate. There is an assumption that staff who are paid just above the national living wage or national minimum wage do not get an additional uplift and are not directly impacted by changes to the national living wage or national minimum wage.

The chart below shows the proportion of staff 25 and over paid at or below the national living wage

The chart above shows the impact of the national living wage on the early years sector. 28% of staff in all providers were likely to be directly impacted by the national living wage in 2019. The proportion of staff affected by the national living wage varies by provider type.

3.2 Non-staff costs

Non-staff costs consist of:

• rent/premises costs
• business rates
• insurance
• utilities
• delivery/materials
• maintenance costs
• interest on loans
• other costs

This does not include meals/catering costs, as these are not a requirement of delivering the funded entitlements. The table displays that in 2019 staff costs make up most of the estimated total cost in providing entitlement hours for both 3 to 4-year-olds and 2-year-olds. Of non-staff costs, in 2019 the largest was rent/premises cost with all other costs being smaller.

Provider cost breakdown for entitlement delivery by age of child in 2019

% of total cost per contact hour* *due to rounding these may not sum to 100%	Staff costs	Rent and premises costs	Utilities	Delivery and material costs	Maintenance costs	Other
3 to 4-year-old entitlements	76%	8%	2%	4%	2%	7%
2-year-old-entitlement	83%	6%	2%	2%	2%	5%

As displayed in the table above non-staff costs account for a much smaller proportion of the total cost per entitlement contact hour for both 3 to 4-year-olds (24%) and 2-year-olds (17%).

Non-staff costs in the early years sector are assumed to increase in line with the general level of inflation in the economy so have been uplifted with GDP deflators. For the purposes of SR20 GDP deflators from the July 2020 OBR fiscal sustainability report were used. For more information on GDP deflators view the HMT guidance.

3.3 Data quality, limitations of analysis and key assumptions

All data sources used were up-to-date as of early November 2020.

There is an underlying assumption that the 2020 to 2021 average funding rates are sufficient to maintain the existing delivery of the entitlements in England.

Factors which could contribute to differences between estimates and eventual outturn include changes in:

• child numbers
• forecast inflation
• additional cost pressures, including those that cannot yet be accounted for due to lack of information at this time
• government policies affecting early years

Estimates for cost pressures are updated at appropriate time points with the latest available data. The assumptions and the methodology are reviewed and refined before each update. While the outputs of the cost model are an important factor in decision-making, changes to the funding rate are determined separately.

The GDP deflator is a key input in forecasting future cost pressures as the broadest measure of inflation in the domestic economy. While price inflation experienced by individual providers may be different, the GDP deflator is commonly used to indicate price changes in public sector expenditure and is recommended by HMT as the most suitable for this national-level time series. GDP deflators from the July 2020 OBR fiscal sustainability report were used in the calculation of the analysis presented in this document.

To note: The OBR revised its GDP deflator forecasts in subsequent economic and fiscal outlook reports. Some of these later series display highly atypical year-on-year movement in the data for 2020 to 2021 and 2021 to 2022 particularly, which has arisen because of the impact of the coronavirus (COVID-19) pandemic on measures of government output used in the GDP deflator calculation, rather than reflecting shifts in prices in the economy.

4. Early years 2021 to 2022 DSG funding rates

DfE gathers a range of evidence on the early years sector to assess the health of the market and its ability to deliver sufficient entitlement places to meet demand. This is done through measuring take up of entitlements, the Ofsted provider and inspections statistics as well as published research on provider finances.

These sources point to a healthy market able to offer sufficient childcare entitlement places. For 2021 to 2022 the DfE will uplift the average funding rates by 8p per hour for the 2-year-old entitlement, and 6p per hour for the 3 to 4-year-old entitlements. This corresponds to a 1.19% and 1.46% increase in the average hourly funding rate for 3 to 4-year-olds and 2-year-olds respectively between 2020 to 2021 and 2021 to 2022. This is summarised in the table below.

Financial year	2020 to 2021 hourly funding rate initial DSG allocations, 2020 to 2021 (the hourly funding rates are calculated by dividing the national funding totals by the PTEs, 15 hours per week per PTE and 38 weeks per year)	2021 to 2022 hourly funding rate initial DSG allocations, 2021 to 2022 (the hourly funding rates are calculated by dividing the national funding totals by the PTEs, 15 hours per week per PTE and 38 weeks per year)	change in EYNFF funding rates* *due to rounding the figures displayed may not be the same as the difference between the 2020 to 2021 and 2021 to 2022 hourly funding rates	Percentage change in EYNFF funding rates
3 to 4-year-old entitlement	£4.83 per hour	£4.88 per hour	+ 6 pence per hour	+1.19%
2-year-old entitlement	£5.48 per hour	£5.56 per hour	+ 8 pence per hour	+1.46%

5. Definitions

Future cost pressures	This is the year-on-year change in hourly entitlement delivery costs faced by childcare providers
Group based providers	Childcare providers registered with Ofsted and operating in non-domestic premises. These include: private group-based providers: these are private companies (both for profit and not for profit) that include employer run childcare for employees voluntary group-based providers: these are voluntary organisations, including community groups, charities, churches or religious groups
GDP deflators	A measure of general inflation in the domestic economy. The GDP deflator reflects movements of hundreds of separate deflators for the individual expenditure components of GDP
National living wage	The minimum hourly rate at which workers can be legally paid, this currently applies to those aged 25 and over, from April 2021 will apply to those aged 23 and over. There are also four national minimum wages for those aged under 23 which have also been accounted for in cost pressure forecasts
OBR Fiscal Sustainability Report	A report published by the OBR which usually focuses on long-term projections for the public finances and sustainability of debt. In the July 2020 report this was extended to include three scenarios associated with the Coronavirus (COVID-19) pandemic
School based providers	This covers nursery provision in schools. The two types of school-based providers are: school-based providers offering nursery provision: These are state-funded and independent schools which offer nursery classes maintained nursery schools: These are nursery schools maintained by a local authority
Spending review 2020 (SR20)	The setting of departmental budgets for 2021 2022 and devolved administrations block grants. The Chancellor of the Exchequer delivered his spending review to Parliament on 25 November 2020
Survey of Childcare and Early Years Providers (SCEYP)	Annually published official statistics providing information on the characteristics of childcare and early years provision in England