Written evidence submitted by the Federation of Small Businesses (FSB)
FSB is a non-profit making, grassroots and non-party political business organisation that represents members in every community across the UK. Set up in 1974, we are the authoritative voice on policy issues affecting the UK’s 5.5 million small businesses, micro businesses and the self-employed. This submission will respond to the relevant questions in the Select Committee’s Call for Evidence on support for childcare and the early years.
We trust that you will find our comments helpful and that they will be taken into consideration.
Childcare Entitlements
How affordable and easy to understand is the current provision of childcare in England and what steps, if any, could be taken to improve it, especially in relation to families living within the most deprived areas in England?
In terms of ease of use, both the childcare service website for providers as well as guidance for parents need to be improved. The current system is difficult to navigate and the content can be confusing, leaving parents unsure of their childcare entitlement and adding a disproportionate administrative burden on small childcare businesses, who are left to guide the parents through the Childcare Choices website.
Unlike larger providers, small childcare businesses do not benefit from the assistance of a finance or administrative team. It is for this reason that systems put in place to support particularly small childcare providers must be efficient, consistent and reliable. To limit the administrative burden being passed onto childcare providers, HMRC should improve the usability of the childcare service website, and the customer service support available to parents to register for childcare entitlements.
Case studies in FSB’s Handle with Care report illustrate how childcare providers have to step in and provide support to parents when navigating the bureaucratic and complex system. Not only do small childcare businesses cite a strain on resources having to invest their own time, and that of their staff, in supporting parents to navigate the childcare service website and register them for their childcare entitlements, some providers raised concerns that the Government’s communication of the scheme was misleading and had led to confusion amongst the parents in terms of how their entitlement could be used. Some parents don’t realise it is only for 38 weeks of the year. Some don’t realise that it doesn’t cover food and other consumables. This creates a discrepancy between the parents’ expectation of a ‘free’ service and the providers’ need to cover additional costs beyond the Government’s subsidy, which can be detrimental to the reputation of the sector.
Statutory guidance for providers of 30 hours free childcare gives information on the different charging models providers may want to consider as part of their offer to parents. This includes the ability to charge for consumables or additional activities. Most of the business owners we spoke to believe there needed to be greater transparency with parents about these extra charges. Government should be clearer in all of its communications about the charging models that providers may choose to use; beginning with updating and improving the information available on the Childcare Choices website in order to help improve transparency of the policy.
On affordability, FSB has consistently called for a review of the local authorities’ funding rates for 30 hours free, and the Government to carry out subsequent annual reviews to reflect ongoing changes in the cost of doing business. Rising staff costs and a significant shortfall between the funding they received from their local authority and the fees they charged parents, is leaving many providers having to find ways to address the gap and supplement their income.
While FSB welcomes the Government’s announcement of a rise in funding by 3.4 per cent for three and four-year-olds and by 4 per cent for two-year-olds in 2023-24, compared to 2022-23 levels of funding, however this is not sufficient to cover the cost. The extra 21p and 17p per hour will not go far enough to support early years settings, as the hourly funding subsidy falls short of the mean hourly fee charged by providers. In 2022 for children aged 2, the mean fee was £5.72, rising from £5.53 in 2021. Similarly, in 2022, the mean hourly fee charged by providers for preschool children aged 3 and 4 was £5.60, compared to £5.39.[1] For 1,140 hours (up to 30 hours a week for 38 weeks of the year) at the newly uplifted minimum funding floor of £4.87, some parents will only be receiving £5,551.8 per child in 2023 – 2034, yet the data above suggests that in 2022, the mean annual costs for 30 ‘free’ hours was £6,384, leaving many providers at an hourly loss per child.
This funding gap harms businesses, who often (at least partially) absorb the additional cost of their hourly rate and/or additional provisions. The funding gap will likely lead to knock-on increases in childcare costs that will be recovered from those parents who purchase more than 30 free hours, or who aren’t entitled to 30 free hours (e.g. because their children are not in the right age range), which in turn will make work less worthwhile for those groups.
We therefore call on the Government to close this funding gap, and to better communicate what does and doesn’t fall within the scope of the 30 free hours entitlement, to help make childcare as affordable as possible, and to build trust between parents and childcare providers.
Are the current entitlements providing parents/carers with sufficient childcare, and to what extent are childcare costs affecting parents/carers from returning to work full-time?
There is a clear economic case for investing in high-quality childcare. As well as an investment in children’s wellbeing, education and life chances, it allows parents to work, raising individuals’ earning potential and household incomes and investing more money in the economy. In the current context of the ongoing skills shortage, it is essential that those who are willing and able to work are not held back from participating in the labour market as a result of childcare supply or affordability issues.
There are many arguments and headlines that suggest that some parents essentially ‘pay to work’, meaning that the cost of childcare outweighs their earnings. For that reason, some choose to exit from the labour market to look after their children and save on childcare costs instead. This is, of course, a grave issue all year round, however especially heightened in the summer holidays, when many families would have exhausted their 38 weeks of entitlement.
The world of work is also changing, with traditional working patterns being eschewed in favour of increasingly flexible arrangements in certain sectors and jobs. Evidence from some of our members suggests that the 30 hours free entitlement is at risk of not being as responsive as it could be to the needs of all working parents, such as those who may be working shift patterns.
Those individuals that require more flexible childcare (such as after 8pm) cannot benefit from ‘free’ entitlement for those hours that are out of scope. Equally, providers cannot offer this care even if they were able to, and wished to. The Government should therefore consult with childcare providers and sector representatives on the current rules around entitlement to explore where greater flexibility that benefits both parents and providers might be possible.
One solution which would boost participation in the labour market for working parents would be to change the way that eligibility for 30 free hours is assessed. Currently, parents are not able to access either ’30 hours free’ or ‘tax-free childcare’ if either they or their partner have an expected adjusted net income over £100,000. FSB recommends that the upper earnings disqualifying criteria instead measure the income of the second (‘second most’) earner, rather than the primary earner.
There is good reason to think that second earners have a higher participation elasticity than primary earners, particularly where the second earner is female and the primary earner male. This change would therefore target policy in a way that ensures better value for money than the current average spend on these policies, have a positive impact on female participation rates in particular, and, due to sorting effects, increase the supply of highly skilled labour.
Whether the current Tax-Free Childcare scheme, and support for childcare from the benefits and tax credit system, is working effectively or whether these subsidies could be better used within other childcare subsidies.
Much like the 30 hours free service, the tax-free system is complex and time-consuming to navigate. Additionally, the £2,000 maximum a year the Government will match childcare contributions from parents should be reviewed.
Claiming support for childcare from the benefit system can also be confusing for users, as it requires individuals to engage via gov.uk which can be clunky. This may deter uptake of the childcare element of other forms of financial support.
While not directly related to childcare providers, it is also worth noting that the child benefit system is also complex to engage with, and the high marginal tax rate between £50,000 and £60,000 creates a deterrent to working parents from earning over £50,000 a year.
For example, DWP’s data shows that only a minority of eligible parents claim the childcare element of universal credit. This may be because it does not fully cover the additional amount charged by providers to deliver ‘free’ childcare.
Instead of redesigning the already complex subsidy matrix, the most straightforward way of dealing with this issue for both parents and providers would be for the Government to fully meet this cost – this also avoids the need for universal credit claimants to deal with the bureaucracy of claiming the childcare element.
Early years provision
What challenges do early years providers face in terms of workforce, including recruiting, and retaining qualified staff, and the barriers faced by individuals joining the profession? To what extent has the Covid-19 pandemic exacerbated workforce challenges?
Traditionally, childcare is a comparatively low paid sector, with average pay levels below the national average. With rising inflation and the cost-of-living crisis, small childcare providers risk losing staff to better paid roles in other sectors, or having to sustain increased staffing costs, which will, in turn, impact their overall operating costs.
With the 9.7 per cent rise to the national living wage (NLW) effective from April, the need for the Government to increase funding for early years settings to ensure providers remain open is essential. If there is no money in the childcare system, there is no scope to increase staff pay to promote staff retention. The Government’s latest survey on childcare provision that found “the total number of providers fell by 3 per cent between 2021 and 2022.”[2] With a staff exodus from the sector due to low pay, providers will be forced to close. This will further strain both the availability and the quality of childcare provision.
Whilst welcome, the additional £20m the Department for Education pledged in December 2022 to help cover minimum wage increases in 2023-24 will likely still leave providers to absorb additional costs of increases in the NLW.
The Government should focus on easing the burden of rising operating costs of small childcare businesses to allow them to invest into attracting new and retaining existing staff. A number of small childcare providers, particularly those running private day nurseries, highlighted the impact of rising business rates on their overall running costs. Although local councils have the power to grant discretionary rates relief, they are unlikely to do so as they would have to meet half the cost at a time when budgets are already being squeezed. The UK Government should assess and learn from the business rates discount provided in Wales and Scotland and create a new 100 per cent business rate relief for childcare providers in England, with central government fully funding the costs of any childcare provider relief and for local councils to be fully reimbursed.
Additionally, the Government should reduce the cost of mandatory training required by childcare professionals and ensure it is flexible to limit the impact on the business and its provision. Our interviews found that small childcare providers are investing considerable time and money in training their staff. However, training remains one of the most significant business costs. FSB believes that the Government should urge local authorities to review their training offer to small childcare providers, particularly for those delivering the 30 hours free, requiring that they find and facilitate access to free mandatory training courses (such as paediatric first aid or safeguarding training) at a minimum level for a site or childminder.
January 2023
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[1] https://explore-education-statistics.service.gov.uk/find-statistics/childcare-and-early-years-provider-survey/2022
[2] https://explore-education-statistics.service.gov.uk/find-statistics/childcare-and-early-years-provider-survey/2022