Nursery Funding

Tuesday 16th April 2013 Westminster Hall

16:55

[Julian Sturdy (York Outer) (Con)]

It is a privilege, Mr Dobbin, to serve under your chairmanship this afternoon for what I think is the first time. It is also a privilege to debate the important issue of nursery funding. As all parents, grandparents, foster carers and indeed anyone involved with young children know, child care funding has been a contentious issue for some years. Indeed, over the past few years, the price of child care has risen by more than twice the rate of inflation, despite average earnings falling back to 2003 levels.

As ever, a quick glance at the relevant evidence illustrates the sheer scale of the problems faced by our nurseries, not only in my patch in York, but throughout the country. More than 600,000 children use the 15,000 nurseries in the UK, 80% of which are in the private, voluntary and independent sector, employing more than 200,000 people. However, occupancy in nurseries has fallen to 71% as parents continue to struggle to pay their child care costs. That in turn leaves nurseries struggling to survive as local businesses.

One of the main reasons for the continuing rise in child care costs is nursery providers having to cross-subsidise the Government’s free entitlement funding. They do so by increasing the fees they charge to families outside the free hours and to those not eligible for funding. The Government are the biggest procurer of nursery places, but they are, alas, among the worst culprits when it comes to paying for the places they procure. The National Day Nurseries Association is a charity that represents children’s day nurseries throughout the UK, and recently announced that 84% of nurseries claim that the funding they receive does not cover their operational costs. That is worrying. In fact, the average shortfall for free entitlement hours is around £547 per child per year, which is a substantial amount in total.

It is important to highlight the fact that local nurseries are also local businesses and, like every other business, they need sufficient cash flow at all times to keep going. It is already apparent that the status quo represents a serious problem and is extremely unfair not only for nurseries that are struggling to cover the cost of the so-called free entitlement, but for families who are being forced to pay increased child care prices to subsidise the Government’s free places.

Before I go further, I am sure that all hon. Members in the Chamber agree that child care is extremely important and offers families, especially women, the opportunity to resume their career after having children, a choice that is welcomed by some and, unfortunately, a necessity for many. Quality child care can make a significant difference to children’s development, instilling many important qualities such as communication among their peers, independence away from their parents, and learning to interact positively.

Sadly however, much of the debate about child care provision focuses on cost, which has had an increasingly negative impact on parents, with many believing that child care is simply too expensive, ruling out the option of returning to work or building a career. Since my election to Parliament in 2010, I have had the privilege of visiting a number of local nurseries in my constituency, such as, to name a few, Little Green Rascals near Elvington, Sunshine Day nursery in Huntington and Tiddlywinks in Osbaldwick. I must also mention an excellent visit to Polly Anna’s nursery in Haxby. Having met, on several occasions, the owner of Polly Anna’s, and having talked at length with the owners of the other three excellent nurseries that I mentioned, it is absolutely clear to me that the tremendous work that is carried out across York’s nurseries—I assume that that is exactly the same across the country—is increasingly under threat as a direct result of funding issues.

The shortfall in funding is due, first, to the free entitlement funding provided by the Government. Free entitlement consists of 15 hours a week for 38 weeks of the year and is funded through the dedicated schools grant, with an estimated total spend of £1.9 million a year. However, there is great disparity across the country in how much is spent on child care by individual local authorities, and therein lies a big part of the problem. The National Audit Office found that free entitlement varied from £2.78 to £5.18 an hour, with the national average placed at £3.95 by each local authority. My constituency receives only £3.38 an hour from the City of York council. I have had many discussions with the council about that figure, but sadly, to no avail.

With regards to the extension of free entitlement to disadvantaged two-year-olds, the Department for Education announced an average funding rate of £5.09 an hour to try and counteract the disparity, but that has unfortunately only led local authorities that were funding more to immediately reduce their rates in an apparent race to the bottom. I appreciate that local authorities need to be held directly accountable for their decisions, but I would be grateful for the Minister’s views on local authorities that seek to spend the bare minimum on nursery funding. The sad truth of the matter is that many child care providers receive low levels of funding for every child under the Government’s free entitlement scheme, which results in nurseries running at a loss. Therefore, they have to increase the price of child care outside the free entitlement hours and of child care for those to whom the free entitlement is not applicable to make up for the shortfall. They cannot charge at the moment for any top-up on those 15 free hours to bring it back to break-even levels.

The coalition Government know that something has to be done about that, which is why the Under-Secretary of State for Education, my hon. Friend the hon. Member for South West Norfolk (Elizabeth Truss), who has responsibility for child care, released her report “More great childcare” on 29 January. The report sets out her plan of action on how the Government will achieve their vision of an exceptional child care market that consistently delivers high-quality early years education—a noble ambition. However, although the report has produced some good ideas on child care funding, it is mainly concerned with reducing bureaucracy, rather than tackling hard financial problems. Changing the staff-to-child ratio is another welcome proposal, and those steps will ultimately result in a more efficient and more respected early years sector. However, I believe that the proposals could go further.

Considering that staff costs, on average, are at least 70% of the running costs of nurseries, there is real concern that any savings that could be made through the staff-to-child ratio will go towards increasing staff pay and training. To my mind, that is completely understandable and the right thing to do. Nurseries must invest in their staff; by doing so, they are investing in their businesses, because the nursery staff are their business. However, that does not solve the problem of child care costs. Currently, only one in three nurseries break even, which is a serious problem that is likely to get worse.

However, laying the blame for such a situation at the door of the coalition Government would be short-sighted. In the past 12 years, the value of free entitlement per hour has increased by approximately 33%, while at the same time, minimum wages have increased by at least double that. With an industry that has such high staff costs, that lack of funding has been keenly felt, so it is my hope that today’s debate will conclude with the Minister proceeding to urge the Government to review their current funding sooner rather than later. In an ideal world, that would enable nurseries to stop increasing the price of child care for those outside the free 15 hours and also to children not eligible for the entitlement.

I appreciate, however, that the Government cannot afford to tackle every issue and reduce the vast deficit simultaneously. I understand the financial situation, the struggles of the Government, and the difficult decisions that they must make. Nevertheless, I strongly believe that ignoring the problem will only result in the price of child care increasing further. It could even be argued that the status quo will adversely affect the wider economy over the longer term. After all, although the Government provide significant public funding in recognition of the value of child care, complicated and inefficient funding mechanisms are often used that result in much of the funding not reaching the providers, and therefore, families are unaware of their entitlement.

On top of that, occupancy in nurseries has fallen to 71%, as parents can no longer afford to keep their children in early years education for long periods of time. If local authorities fail to cough up adequate funding from central Government, there is a real danger that nurseries will continue to suffer from under-occupancy, leading to closures and creating local unemployment. In the two years leading up to September 2011, official figures highlight the fact that more than 700 nurseries have closed. I fear that the Treasury will lose out over the long term if it fails to work with the Minister’s Department to rectify the funding deficit now.

I have discussed the idea of more funding for free entitlement places. However, I have also touched on the possibility of altering the allocation of such funding, which could involve, at little extra cost, the removal of local authorities as the middlemen in the funding entitlement. That is an important point to bear in mind, because nurseries up and down the country understand that the Government cannot just throw money at the sector. We are living in hard economic times. However, as I have previously stated, I believe that the cost of doing nothing will be far greater.

The Government previously introduced reforms to every local authority back in 2011, as it was thought that nursery funding was inconsistent and patchy across the country, with too many children, particularly from disadvantaged families, not accessing any or all of their free nursery hours. Consequently, it was announced that the free entitlement for three and four-year-olds would be extended to 15 hours a week and that it would reach the most vulnerable families who stand to benefit from it most.

There are still several problems, however, when it comes to distributing the free entitlement to the providers. For instance, a lot of fraud and error still exists in the tax credit system, with £265 million being lost from the child care element of working tax credit. Many nurseries are also not informed if parents are in receipt of the child care element of working tax credit, which means that levels of parental debt are increasing, as the designated funding is not passed on. One nursery in my constituency has told me that its level of bad debt has gone up ninefold this year, and sadly for many, that is unsustainable. Consequently, direct funding to the provider could solve a number of problems, and I would be interested in the Minister’s views on that.

Overall, the purpose of today’s debate was to raise the issue of nursery funding with the Minister and hopefully manage to strike a chord. However, I will finish by asking whether the Minister or his colleague will meet me and some local nursery representatives from York to discuss the issue that they face directly. It is important that the Department hears directly from the nurseries that are so affected at the moment—as I say, the purpose of such a meeting would be to discuss the problems surrounding nursery funding. I hope that through this speech I have managed to convince the Minister to review the existing funding system and arrangements from the perspective of the nurseries, in relation to child care and the long-term sustainability of our nurseries, not only in York, but across the country.

17:09

[The Minister for Schools (Mr David Laws)]

It is a pleasure to serve under your chairmanship again, Mr Dobbin. I apologise for the fact that you have had to listen to me twice on different subjects this afternoon.

I congratulate my hon. Friend the Member for York Outer (Julian Sturdy) on securing a debate on such an important issue. It is of great relevance not only in his constituency, but, as he explained very clearly and ably, throughout the country. He explained concisely and effectively the concerns that providers, including those in his constituency, have about the funding of early education and their determination to ensure that we have a rational funding system that gets adequate amounts of money through to the front line to do the vital job that he referred to.

I apologise to my hon. Friend for the fact that the Under-Secretary of State for Education, my hon. Friend the Member for South West Norfolk (Elizabeth Truss), who leads on child care, is not able to be with us in the debate. She is abroad today. She passes on her apologies to my hon. Friend the Member for York Outer and has indicated to me that she would be happy to meet him to discuss these issues with him and anyone he wants to bring along from his constituency, so I hope he will take up that opportunity directly.

My hon. Friend has raised a number of important issues that I should like to deal with directly. Those issues are reflected in many of the recent debates on how to ensure high-quality and affordable child care throughout the country. I am therefore grateful for the opportunity to deal with the points that he has raised, which will be of concern to other hon. Members and to many people who rely on this industry and who work in it.

I should like also to outline some of the reforms that we have made and are in the process of making, and the further reforms that we plan for free early years education—some of the other reforms that my hon. Friend the Under-Secretary has announced recently. It is important to locate the reforms within the broader vision for child care and early years education as a whole, which was championed so effectively by her in the paper entitled “More great childcare”. As my hon. Friend the Member for York Outer mentioned, the Government published that document in January. It sets out an ambitious vision for child care and early education to ensure that we provide the best start for young children and help those parents who want to go into employment to have the child care that they need in a flexible and affordable way.

The vision is to create a dynamic and thriving child care sector in which the emphasis is firmly on quality and which draws upon international evidence of what works best. “More great childcare” is clear that, to achieve that vision, we need a child care profession that attracts the best possible staff to work in it and to lead it. Those people should have a passion for what they do, but, importantly, they must also be highly trained and highly qualified, which has not always been the case.

We need to give providers the flexibility that they need to deliver the best for children and, by doing so, create more affordable, better-quality early education and care, which will help children and ensure that parents can feel confident about returning to work. Alongside that, we are working with Ofsted, as my hon. Friend will know, to create a system of regulation and inspection that has high expectations of quality and that ensures that the quality improvements that the Government aspire to are delivered on the ground.

We need to free providers from unnecessary bureaucracy and give them more flexibility to focus on what makes a difference in improving the impact of early learning on children, not least those from disadvantaged backgrounds, for whom early intervention is particularly important. We need to improve the effectiveness of those who work every day with young children to build a stronger, more professional work force, giving providers greater flexibility to invest in high-calibre staff, as well as overhauling the existing early years qualifications.

“More great childcare” also explained how the Government propose to reform funding for early education. The high-level objectives are clear: simplification, greater transparency and ensuring that as much funding as possible reaches the front line. The responsibility for distributing early education funding rests, of course, with local authorities, which should know their local child care markets. Most visibly for nurseries, that role means setting hourly rates through the early years single funding formula.

My hon. Friend also highlighted a weakness in the early education funding system—the lack of transparency. Some providers have concerns that local authorities do not always pass on enough of the funding that they receive from Government, but, by extension, they find the funding system hard to understand. In too many cases, they do not know what funding decisions local authorities reach—I am talking about many of the people in their areas. Given how providers are affected by those decisions, that cannot be right, so the Government are changing it through the reforms that we have announced.

Working with a number of provider groups, the Department now publishes financial benchmarking data annually. Those data show simply and clearly the funding decisions taken by local authorities across the country. Importantly, too, the data enable providers to compare decisions across local areas. A system of effective local decision making relies on active local accountability, and we are giving providers the information that they need to exercise that accountability. However, we want to go further, and the recent two-year-olds early education funding allocation shows how that might be possible.

As my hon. Friend said, the Government are expanding early education to two-year-olds from lower-income households. That starts with the most disadvantaged 20% of two-year-olds, which is about 130,000 children—

17:16

Sitting suspended for a Division in the House.

17:19

On resuming—

[Mr Laws]

The Government are expanding early education to two-year-olds, particularly focusing on lower-income households. That starts with the most disadvantaged 20% of two-year-olds—about 130,000 children—in September this year. From September 2014, it will be extended to 40% of children—260,000 in total. That ambition is matched by significant new investment. National funding to support the initiative will reach £760 million in 2014-15. The Government also allocated £100 million of capital funding to local authorities in November last year to support delivery of the new entitlement. That real opportunity for providers will inject a great deal more money into the child care system.

Funding for two-year-olds is not encumbered by the complexities and historical problems that affect schools more widely and early years funding. The new two-year-olds entitlement has enabled the Government to put into practice their ambitions for transparency and simplicity in early education funding. In November last year, the Government allocated the first £525 million to local authorities for two-year-olds early education in 2013-14. For the first time, the Department was able to publish details of how much every local authority is allocated. It could point to an average national hourly rate that underpinned the allocations. That hourly rate should translate into attractive rates for providers locally. The national average rate of £5.09 per hour compares favourably with the £4.13 that the Daycare Trust found in its 2012 child care costs survey, which providers are charging parents per hour. In fact, £5.09 still compares favourably to the £4.26 per hour in its recently published 2013 survey.

I was interested to hear my hon. Friend say that there was evidence that some local authorities might not be funding properly at the full rate. The Government were clear that they wanted local authorities to pass on the new two-year-olds funding in full at the hourly rate. The Department does not recognise the problem of local authorities not passing on the rate in full, but we will collect data on the hourly rates and publish them as soon as possible, and the point that he made today will reinforce that. It will enable providers and others to see exactly what rates local authorities are funding at and to challenge local authorities where there is a discrepancy between the rates that we are funding at nationally and the rates on the ground. If he has any further evidence on that from his area, we would be delighted to see it.

My hon. Friend explained with great clarity the concern of many nurseries that local authorities hold back too much of the funding allocated by Government. In 2012-13, the latest year for which we have data, local authorities retained centrally £160 million out of total dedicated schools grant spending of £2.1 billion. That masked great variations, however, with many retaining little or nothing. Let me be clear: some central spending by local authorities is important in, and indeed critical to, delivering the Government’s vision of early education transforming the life chances of many children. Central spending is often used to purchase, for example, specialist help for providers working with children with special educational needs or other additional educational needs to help them to access early education. Such spending is frequently welcomed by providers and must continue.

Equally, in the current economic climate, we must ensure that every penny is being used effectively. For 2013-14, we introduced, for the first time, the requirement that local authorities must secure schools forum approval for centrally retained early years spending. That gives power back to local providers, but we want to go further.

As my hon. Friend knows, the Government are consulting on reforming the local authority role in free early education. In that consultation, the Government propose two reforms to how local authorities retain funding. First, we propose a new definition specifying what authorities can and cannot retain funding for. In “More great childcare”, the Government were clear that the role of local authorities in early education should be refocused on tackling disadvantage to ensure that all children can experience high-quality early education. In other areas, the local authority role should be more limited. For example, the Government want Ofsted to be the sole arbiter of quality in early years, rather than replicating the job that local authorities have done in the past.

Secondly, we are seeking views on percentage limits on how much of their early years budget authorities may retain for those purposes. We will take into account fully the views of providers responding to the consultation.

The Government also want a simple and clear funding offer, so that nurseries know and understand the funding that they receive and bureaucracy is kept to an absolute minimum. We are consulting on proposals to simplify and rationalise the early years single funding formula. From that, I am confident that we will put in place changes to introduce a simpler and less burdensome system of funding. I have already touched on the complexities and historical problems of early education funding for three and four-year-olds. The changes will resolve those problems. I hope that my hon. Friend will take up the opportunity to meet my hon. Friend the Under-Secretary further to develop the points he made so powerfully today.

Question put and agreed to.

17:30

Sitting adjourned.