Council underspends in early years at highest level at £70m

An investigation into ’free’ childcare funding for two to four-year-olds across England has uncovered record levels of underspends, according to National Day Nurseries Association (NDNA).

NDNA discovered that at least £70m of early years entitlement funding was underspent in council budgets and not spent on places during the financial year 2022-23. Only a very small proportion, 12% of councils, said they later passed any of their leftover budget to providers to help with underfunding.

The rest of the money was either put into reserves or used to offset other deficits within the Designated Schools Grant (DSG).

In total, 104 local authorities reported an underspend out of the 137 who responded to NDNA’s Freedom of Information (FOI) request, amounting to 76% of councils. Almost a quarter of these (25 councils) reported underspends of more than £1m each. Essex reported the largest underspend with £4.9m left over at the end of the year 2022-23.

Of the remaining respondents, 22 councils reported overspends amounting to £7.4m. This figure was much lower than 2021-22, at £23.1m. Where councils overspend, they must recover funding from future years meaning funding rates to providers can be lower.

Purnima Tanuku OBE, Chief Executive of National Day Nurseries Association (NDNA) said: “These shocking findings really emphasise that the current way of funding early education and care places is not fit for purpose. The system is too complex for parents, providers and local authorities. It is the children who lose out when funding doesn’t reach the front line.

”We have been warning about these complexities for the last five years when we have been publishing this data. It is extremely worrying to see that the underspends are now at record highs when we have also seen record numbers of nursery closures.

“It’s clear that councils are under pressure as almost half of this money has been put into reserves, with most of the rest used to offset budget deficits particularly within the high needs block. Only 12% of councils passed any of this left-over funding to providers, meaning funding is just not reaching those who are working with our youngest children.

“However, providers are under even more pressure with the vast majority telling us that current funding rates do not cover their costs. NDNA has been calling for the DfE to ringfence this money which is meant for providers to deliver high quality early education and care to all children who need it. The current situation means that any left-over funds are used to bolster other areas within the schools grant which is unfair. This practice must end.

“Ultimately, the complexities in the funding model must be resolved. We want to see all early education and care funding for families come into a single account which parents can use with their provider of choice. This will simplify the model for everyone, reduce unnecessary admin costs and ensure funding follows the child.”

The Department for Education (DfE) works out a funding formula for each local authority and gives them a lump sum depending on how many two, three and four-year-olds are expected to take up funded places in their borough. Councils are entitled to top slice up to 5% of their allocation for administration, support to the sector and to carry out sufficiency duties.

The average pass-through rate was reported to be 96.34% across the 130 councils who responded to that question. Of these, 127 said they passed 95% or above, with 44 saying they passed through exactly 95%. 

Purnima added: “It’s good that most local authorities are passing through at least 95% but there are still some local authorities who are not fulfilling this duty based on what they told us. There are some councils who are already surpassing the DfE’s aims for a 97% pass through and we hope others will do more to meet this ambition and ensure funding for children is used for that purpose.”

NDNA put out a Freedom of Information (FOI) question to 150 local education authorities in December 2023 regarding whether they had an underspend or an overspend once 2022-23 accounts had been finalised. We also asked about DfE adjustments to their allocations and what percentage of their total entitlement they passed through to providers. We received responses from 137 councils although some had not answered all the questions.

Responses in numbers:

• Responses from 137 out of 150 although some left some questions unanswered or gave unclear answers to some of the questions
• 104 councils (76% of respondents) reported an underspend totalling £69,571,494.87 – last year was £45.8m
• 25 LAs reporting more than £1m each (24%) – highest £4.9m Essex (see chart below)
• Of these £1m+ councils, 11 put this money in reserves; 6 used some or all to pay providers; 2 don’t know or didn’t give an answer; 4 offset deficits and 2 offset high needs deficits specifically
• 12 passed all or some to providers – 12% of those who underspent
• 50 put their underspends into reserves or carried it forward to next year’s budget – 48% of those with underspend
• 15 hadn’t agreed any actions or not given an answer re their underspend – 14%
• 25 used underspends to offset deficits (24%); 8 of these specifically were used for high needs block (8%)
• 3 said their underspend was clawed back by DfE (3%)
• 22 councils (16% of respondents) reported an overspend. This totalled £7,369,734 whereas the previous year 45 LEAs reported overspending by total of £23.1m
• 11 LEAs reported their accounts as exactly balanced – ie. they had no money left over or overspent

*  LEAs reported underspends of over £1m in one previous year since 2018

** LEAs reported underspends of over £1m in two previous years since 2018

*** LEAs reported underspends of over £1m in three previous years since 2018

Pass through rate

• 130 LAs answered this question, average pass through rate was 96.34%
• 7 didn’t answer this question but sent a response to the FOI
• 44 LAs gave answer of 95% exactly
• 127 gave answer of 95% or above
• 6 gave 100% or more; 1 answered 109.1%, after including SENIF
• 3 below 95%

Regional analysis:

• NE region – all but one had underspend (South Tyneside had overspend) – none passed to providers; 1 not received (Darlington)
• NW – five LAs had overspends; two reported balanced; 15 underspent, only Liverpool passed all or some to providers
• Yorkshire & Humber – all but Calderdale had underspends – 3 of more than £1m – only 2 passed any to providers
• East Mids – all underspends apart from Leicestershire – 2 more than £1m; 2 not received, none passed any to providers
• West Mids – all but two underspends apart from Herefordshire (overspent) and Shropshire (balanced), most put into reserves, none passed anything to providers
• East of England – two very large underspends included Essex £4.9m and Herts £2.4m, also Norfolk £1.4m; 9 underspends in total, 2 passed some to providers, 1 overspend
• London – 4 balanced, 6 overspent, 20 underspent with 7 underspent by more than £1m – only 4 passed any to providers; 2 not received
• SE – 4 no responses, 1 said underspend but gave no amount; 9 underspends with 3 more than £1m, 3 passed some to providers; 2 overspent, 3 were balanced
• SW – 2 not responded/answered; 7 underspends, 1 more than £2m; 1 was balanced; 3 didn’t give an answer to pass through question; 4 were overspent; none passed anything to providers

DfE adjustments:

• Total amount of in-year positive adjustments = £51,933,338.00
• Total amount of in-year negative adjustments = -£9,966,483.00
• Total post-year positive adjustment = £18,577,136.00
• Total post-year negative adjustment = -£13,140,123.00
• Net total adjustment = £47,403,868

Check your local authority’s situation for 2022-23 on this summary spreadsheet:

• England
• NDNA

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