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Free Childcare and Nursery Providers

Volume 597: debated on Wednesday 24 June 2015

[Mr Peter Bone in the Chair]

I beg to move,

That this House has considered free childcare provision and nursery providers.

It is a privilege—[Interruption.]

It is a privilege to serve under your chairmanship for what I think is the first time, Mr Bone, and to have secured this debate.

As was made clear in the Queen’s Speech, the Government are introducing measures to help working people by increasing the provision of free childcare. The announcement was welcomed by many people up and down the country and in my constituency, and it provides us with a great opportunity to launch a full review of childcare funding.

I secured a debate in this Chamber on nursery funding back in 2013, in which I explained that one of the main reasons for the continuing rise in childcare costs is the fact that nursery providers have to cross-subsidise the free entitlement funding provided by the Government. I stated that although the Government are the biggest procurer of nursery places, they are the worst culprits when it comes to paying for the places they procure. I am sorry to say that little has changed since then. For years, free provision has been subsidised by providers and parents due to a lack of adequate funding.

Doubling provision should benefit parents in my constituency and across the country. However, there is a danger that not implementing the change properly will lead to a more expensive system and more expensive childcare from the outset. The free hours could ultimately harm the very people the policy is supposed to help.

The Government have promised to include in the Childcare Bill a proposal to double free provision for three and four-year-olds in England. The current allowance is 570 hours of free early education or childcare a year, which works out at 15 hours a week for 38 weeks. It is thought that up to 600,000 families could benefit from the doubling of the provision and save as much as £5,000 a year. The change is due to come into force in September 2017, although there will be pilots in September 2016.

I have two children of my own, so I am fully aware of how expensive childcare can be. The cost of childcare is one of the biggest barriers that the UK’s 2 million single parents face to finding and staying in work. I therefore want to make it clear that I welcome and support the policy. At the same time, however, I want to offer a word of caution about the policy’s implementation and the impact it could have on nursery providers.

Since the announcement in the Queen’s Speech, I have been approached by several owners of nurseries in my constituency, who have all been keen to get clarity about exactly what the policy will mean for their businesses. Among them were the owners of Station House children’s day nursery in Dunnington and of Polly Anna’s nursery in Haxby. Both providers see the benefits of such a policy, but they agree that providers will be able to offer the increased number of hours only if the funding covers the cost of provision. In many areas, it does not.

Over the past few years, I have had the privilege of visiting a number of nurseries in my constituency—Little Green Rascals near Elvington, Sunshine day nursery in Huntington, Tiddlywinks in Osbaldwick, Quackers in Copmanthorpe and Polly Anna’s nursery in Haxby, to name but a few. Having met the owners of those nurseries and kept in contact with them over various funding issues, it is clear to me that they do a tremendous job. Nurseries carry out an essential service for parents and families, not just in my constituency but across the country. However, that essential service is increasingly under threat as a direct result of the funding issues.

As we all know, parents in the UK receive help with their childcare through free early education. In England, central Government allocate money to local authorities through the early years block of the dedicated school grant, with an estimated total spend of £2.2 million a year. However, there is a great disparity across the country in how much is spent on childcare by individual local authorities. Therein lies the problem. The National Audit Office found that free entitlement varied from £2.78 to £5.18 an hour, and that the national average was £3.95. My constituency receives only £3.38 an hour from City of York Council. The sad truth is that funding for the 15 hours a week of free provision falls well short of the cost. To be precise, the shortfall is about £800 a child, which results in nurseries running at a loss for those 15 hours. They therefore have to subsidise that loss through the price of childcare outside the free entitlement hours.

Following my previous debate, which centred on those issues, I secured a meeting with the former Minister to raise my concerns face to face, alongside a group of local nursery providers from York. The Government have been aware of the problem for some time. The Minister has been proactive in his discussions with nursery providers, and has met providers from my constituency. Some positive news is starting to come out, including the announcement that the Minister will oversee a funding review of the entitlement, which is due to start in the next few weeks.

I warmly welcome the Minister’s commitment to raising the hourly funding rates paid to providers for places. However, the review is being undertaken at a time when costs to nursery providers are set to increase further, with pension auto-enrolment responsibilities coming in for many small and medium-sized nurseries. The pressure increases when the payment for funded hours is delayed. More than 40% of local authorities are paying more than a month after the start of term, although, as we all know, the law requires them to pay within 30 days.

I am acutely aware that the burden of business rates and VAT is continuing to push up the cost of childcare, which constrains the ability of nurseries to offer more places. The average annual business rate paid by nurseries is almost £16,000, which is why I welcomed the intervention of the Department for Communities and Local Government. In January, it wrote to all English local authorities to ask them to consider granting business rate relief to childcare providers. Local authorities have had that power since the Localism Act 2011 came into force, and the Government will fund 50% of any discretionary relief schemes that councils introduce.

Following the DCLG’s announcement, I wrote to my local authority, City of York Council, to ask it to consider granting business rate relief to childcare providers in the area. Sadly, it refused. Interestingly, when the chief executive addressed the National Day Nurseries Association conference earlier this month, she reported that she had written to every local authority in England on the issue, but had been told that none would be implementing business rate relief for nurseries, which I find extremely disappointing.

Although there are political differences over childcare policy, there is broad support for the current approach of both supply-side and demand-side subsidies. However, compared with many other developed countries, the public funding of childcare in the UK is complicated to say the least. It is complex and expensive to administer for Governments and complex for providers and parents. I therefore believe that the policy to double free provision for three and four-year-olds provides a perfect opportunity to launch a full review of childcare funding and set in place the changes that will ensure simplicity, progressive levels of support, quality—that is absolutely key in this field—and accessibility.

Take-up of the current 15 hours of free provision for three to four-year-olds is at 96%, but it is much lower for two-year-olds. That is because some providers have opted out because they believe that the hourly funding rate is not financially sustainable. Many nurseries operate complex cross-subsidy mechanisms, and they rely on working parents of three and four-year-old children to purchase extra hours on top of their existing 15 hours of free provision. As I have made clear throughout the debate, I have sympathy with providers regarding underfunding. I hope that the upcoming funding review led by the Minister will bring meaningful reform.

Only quality provision helps narrow the gap between disadvantaged children and their peers. The owner of Polly Anna’s nursery in Haxby in my constituency told me that when he opened his nursery in the early 1990s, only doctors and accountants could use it; it was unusual for women to go back to work. Now we have flexible working, and free childcare has opened up day care to a range of families. Doubling free provision will only add to that trend, but it can be successful only if it goes hand in hand with a full review of childcare funding.

Money is allocated to local authorities through the dedicated schools grant. For three and four-year-olds, the rate per pupil is largely determined by historical precedent; it is not based on the characteristics and needs of the children. Early years funding should be brought more closely in line with schools funding, whereby money is allocated on the basis of a larger number of criteria, which include pupil numbers, deprivation and attainment to name a few. That would ensure that funding matched children’s needs and the cost to providers of providing early education. In addition, we could consider a national formula with two rates—one for London and one for the rest of England—similar to the funding formula for two-year-olds, which is fairer and more transparent. Local authorities receive a flat hourly rate per child of £4.85, supplemented by an area cost adjustment in places where wages are higher. That would be a much clearer funding system and would help to streamline the number of complex formulas in place.

Overall, although childcare represents a significant outlay to parents, it is important to remember that by its very nature it will always be expensive. It is not fair to suggest that high childcare costs are simply the result of providers charging high fees to hard-pressed parents. The reality is more complex. Childcare should never be provided on the cheap, and we must ensure that measures to make it more affordable do not compromise its quality. For me, that is crucial. Although successive Governments have increased help with childcare costs, parents in Britain still spend a higher proportion of their income on childcare than parents in most other developed countries. On top of that, some childcare providers struggle to break even. All that is indicative of a childcare system that is not working.

I view the proposals to double free childcare provision as an opportunity to fix these long-standing problems once and for all. We have a chance to make a real change to help not only nursery providers but parents who use such facilities, and I hope the Government will grasp it with both hands. I am encouraged by what I have heard from the Minister in our previous conversations on the issue.

I thank my hon. Friend the Member for York Outer (Julian Sturdy) for the opportunity to have this debate. It is timely in the light of the Government’s commitment to double the free childcare available for working families. Like him, I am a father; I have a 14-month-old who goes to nursery, so I experience the childcare market from the point of view of a parent, not just a politician sitting in Westminster making decisions about the sector.

My hon. Friend dwelt on the challenges that the nursery sector faces, but I would like to counter that: the childcare market is much broader than the nursery sector. The vast majority of places are provided by private, voluntary and independent providers. We also have childminders and school nurseries, but the bulk of the formal childcare that the Department is concerned with is provided by those three sectors. When we talk about the market and the challenges it faces, it is important to recognise how broad the market is and the different types of service offered. For example, childminders offer childcare in a domestic setting, whereas nurseries are more of an organisation and children are taken to them. Each provides slightly different challenges to and opportunities for parents.

For many families with young children, childcare is not an issue, but the issue. Many parents want to go back to work or work more hours, but find that the cost of childcare makes doing so unaffordable. The Government want to reward hard-working families by reducing their childcare bill. That said, policies are not just about the parents; we also recognise that childcare is about the child. A lot of development happens in the early years, so the quality of childcare provision is as important as making childcare available. That brings me to the key challenge we face in the sector: how do we make childcare affordable, ensure sufficient quality and ensure that it is available in the form that parents want? Every parent knows that the childcare needs of parents are not consistently the same across the board.

In responding to my hon. Friend, I will take the opportunity to make general points about our childcare policy. I am proud of our record to date. We are the first to fund 15 hours of free childcare for all three and four-year-olds as well as 40% of two-year-olds. We legislated to introduce tax-free childcare; the 1.8 million families who want to buy additional hours can get up to £2,000 off per child per year. It is important that the policy applies to children from age nought to 17, in the case of children with disabilities. Tax-free childcare can help parents not only with childcare in the early years, but with wrap-around care, whether that is breakfast or after-school clubs. We have also increased the child element of tax credits and introduced shared parental leave.

We need to do more to ensure that we are enabling families to make the choices that are best for their circumstances. In doing so, it is worth recognising, as my hon. Friend implied throughout his speech, that in many cases it is businesses that are delivering these services for parents, so we need to ensure that the funding is sustainable. That is why we have talked about implementing the funding rate for the new 15 hours in a way that is not only fair but sustainable, to ensure—crucially—that children have the best start in life, with affordable, safe and high-quality childcare.

More broadly, our businesses and economy depend on working parents, who themselves depend on access to high-quality childcare. However, what the childcare and early years survey tells us is that 22% of working parents have found it difficult or very difficult to pay for childcare; for lone working parents, the figure rises to 38%, so there is a lot more that can be done.

The conundrum is that the Government already invest £5 billion per annum to support parents with childcare. How can we be in a situation where we are spending that money yet some parents still say that they find the cost of childcare to be too high? The Childcare Bill will take further the support that parents can get, delivering on our manifesto commitment to support children at every stage of their life.

We will extend the entitlement of 570 hours for all three and four-year-olds, and I am happy to report that take-up of the existing entitlement in York is already higher than the average. With the new entitlement, working families will receive more childcare support than ever. It will guarantee them about 1,140 hours of free childcare, worth more than £5,000 a year per child.

I will make a comment about the funding rate, which was a key part of my hon. Friend’s speech. Yes, we need to look at the funding rate for the first 15 hours as well as for the second 15 hours, and I hear the complaints that nursery providers have made. However, it is worth making it very clear that the impact of the funding rate on a business is as a result of a number of factors and not just the rate itself, although it is important. For example, whether or not the local authority top-slices the funding that goes from central Government to providers determines whether providers receive more or less than the rate that central Government determine. Also, the flexibility that local authorities allow providers to deliver their 15 hours is important, because if local authorities are quite inflexible in the scope for providers to allocate the 15 hours in a way that works best for their business, that will invariably impact on the profitability of providers. Thirdly, the business model decisions that operators make impact on how far that money can go. When we consider the sustainability of this model, we need to look at all those things in the round, as well as obviously focusing on the funding rate available.

To support the market beyond the funding rate, I worked with the Department for Communities and Local Government in the last Parliament, urging local authorities to work with childcare providers and to ensure that charitable and non-profit providers benefit from the business rate relief that they are entitled to. Any nurseries that are registered charities will already benefit from rate relief. The smallest providers, including childminders, benefit from small business rate relief, although any further relief would require local authority discretionary relief.

I heard what my hon. Friend said about local authorities granting or not granting that relief. I intend to continue to work with the National Day Nurseries Association to find ways to ensure that the necessary action is taken to help reduce the cost of provision for childcare providers. I understand where he is coming from and I will take action, as he suggests.

Having said that, I counter the idea that somehow the childcare day market is not thriving; in fact, I would say that the opposite is true. The childcare day market for children aged from zero to five is vibrant and thriving. In 2013-14, it was estimated at £4.9 billion, which means it is about a third larger than it was a decade ago. The number of places in the sector has gone up by 12%, and roughly 230,000 places were created between 2009 and 2015. We recognise the challenges, but those are signs of a sector that is rising to those challenges.

To help the sector meet those challenges we are listening to its input. I have announced a review on the cost of providing childcare and it is now under way, with more than 300 responses in the first 24 hours or so. Clearly, the sector is aware of and engaging with the call for evidence. The review will report in the autumn and I encourage providers in York and throughout the country to respond.

As my hon. Friend pointed out and as I touched on earlier, the issue is not only about the funding rate, but about payment practices. I have heard that from all sorts of providers, including some of the largest ones in the sector, so we will be looking at that. The average paid to local authorities by central Government is about £4.51 per hour for three and four-year-olds; that is in excess of what he said providers in his York constituency are receiving. In fact, that rate is higher than the one in the Family and Childcare Trust survey, which showed that an average nursery is charged £4.47 per hour for children aged two and over. That is an indication of why we need to look at what is happening between the rate set by central Government and the rate received by providers. Why does it differ so much between local authorities and between types of provider? That is not to say that we do not accept the need to look at the overall rate, but we need to look at the other aspects as well.

My hon. Friend touched on the funding formula, but the funding system for three and four-year-olds includes historical inconsistencies that result in large variations in funding distribution between local authorities. There are also variations in the funding passed on by local authorities to providers. In the previous Parliament, we started to look seriously at such problems to create greater transparency for parents and providers. We now publish an annual benchmarking tool that lists every council’s funding and how much it passes on to different providers. That should help parents and providers to have informed conversations with councils, but should also hold them to account. I am confident that if we look at all such things seriously, the extended entitlement will provide an opportunity for existing providers to expand and for new providers to enter the market, giving parents choice and helping to build our economy.

The market is healthy and growing. I am sure that my hon. Friend will be interested to know that in York 4Children has developed a fantastic childcare hub with a blended childcare offer, where schools and private, voluntary and independent providers are working together to provide high-quality childcare. That is one example of innovation in the sector that can be used to boost capacity, higher quality and flexibility for parents. Generally, to be able to deliver for parents in a cost-effective way we need more of such innovation, rather than having a sector that operates in silos.

My hon. Friend talked about nursery provision. Many maintained nursery schools deliver the highest quality early education, often in disadvantaged areas where it can make the greatest difference. I fully support such schools, because they are delivering high quality. We will ensure that they, as well as private and voluntary providers, can continue to thrive.

I am also proud to say that the quality of providers continues to improve. In York, 91% of early years settings are rated as good or outstanding, compared with 80% nationally. That is an encouraging statistic. Additionally, 64% of children in York achieved a good level of development in the early years foundation stage profile, compared with 60% nationally in 2014. The Government’s childcare policy will have a direct and significant impact on the lives of children and families throughout the country. It is right that it should be subject to the most thorough scrutiny, such as that from my hon. Friend this afternoon.

Motion lapsed (Standing Order No. 10(6)).