Free childcare crisis as surge in demand leaves Labour with funding black hole

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Ministers have been warned the childcare sector is at risk of 'collapse' after a boom in demand for free care left a major government scheme in financial peril.
A plan to expand free childcare for British families is set to cost the government an extra £1bn per year at a time when ministers are grappling to fill the gaping black hole in public finances.
Labour has not spelled out how the funding gap will be filled, but experts predict the shortfall will create 'substantial pressure' on the government and could put the entire childcare sector under threat.
In an exclusive interview with The Independent, Bridget Phillipson insisted the unexpectedly high take-up – a quarter higher than predicted – was a 'good problem to have' and would not leave children without places.
But the education secretary could not guarantee that parents would get a space at their local nursery in September, when the scheme expands to offer eligible children aged nine months and older 30 hours a week of free childcare.
Industry leaders said parents would be left 'disappointed' while nurseries warned a lack of staff meant they were already struggling to deliver the government's pledge.
Providers warn that the rate at which the government funds places is lower than the costs that they incur - and that greater numbers of government-funded places will reduce their ability to cross-subsidise from private fee payers.
CEO of the Early Years Alliance, Neil Leitch, told The Independent: 'One thing is absolutely clear: if 80 per cent of all hours delivered are government hours, and those hours are inadequately funded, the infrastructure will collapse over a period of time.
'I can't say it will be one year or five years, but you can bet your bottom dollar if you don't give somebody enough money to deliver a service, at some point they stop.'
Figures published in March show the number of people newly entitled to free childcare was 26 per cent higher than originally estimated – 379,000 compared to 302,000.
This meant that the Department for Education spent £2bn on the policy last year, up from a planned £1.6bn. But this is only set to grow as further hours of free childcare are rolled out.
According to the highly respected Institute for Fiscal Studies, the cost of extending free childcare to under-3s could end up costing £1bn more a year than previously expected, from 2026/7 onwards – up from around £4bn to approximately £5bn.
A boost to funding announced in Rachel Reeves's spending review, of £640m, would 'go some way to filling this gap… [but] could still leave substantial pressure from higher-than-expected take-up', the IFS said.
IFS associate director Christine Farquharson said the DfE will still likely face 'difficult choices' within its budget and may have to 'trim back' spending in other areas to meet its childcare commitments.
'They have a fixed pot of money. When one thing becomes more expensive, that puts more pressure on other areas of the [education] budget,' she told The Independent.
Ms Farquharson said predictions for how many parents would take up the free hours were 'complex' but added: 'It does seem like [the Tories] underestimated take-up pretty systematically.'
It is just one of many financial decisions facing the chancellor ahead of the autumn Budget after planned welfare cuts, aimed at saving £5bn annually, were reversed. Ms Reeves is being pushed to bend her rules on borrowing or to raise taxes to keep public finances on track.
The free childcare policy was launched in December 2023 with great fanfare under former Tory chancellor Jeremy Hunt. The first stage was put in place from September 2024, when the government extended 15 hours a week of free term-time childcare to working parents with a child aged nine months and over. From September, that will be extended to 30 hours a week.
Labour say they were left a 'pledge without a plan' when they entered government. Ministers have been working to massively expand the number of nursery spaces and staff but the task has been made more difficult by the fact that, unlike schools, many nurseries are private providers.
Industry leaders warned that, with 8 in 10 of all nursery hours soon to be paid for by the government, the infrastructure was at risk of 'collapse' without more money.
The sector has already been forced to absorb huge additional costs in recent years, including April's national insurance rise, it warned. Childcare in the UK is one of the most expensive in the world, according to the OECD.
Mr Leitch added: 'What we have to bear in mind is that we've already got a recruitment and retention crisis. The reality is, many settings don't have the people to be able to accommodate those additional hours. So I'm afraid there will be parents that will be disappointed.'
Sarah Ronan, the director of the Early Education and Childcare Coalition, said the IFS was right to sound the alarm, adding that if the government did not match demand with funding it is leaving providers with 'no choice' but to limit the number of places they offer – or raise fees.
'The harsh reality is that if providers don't do that, they'll face closure and then we'll have an even worse crisis on our hands,' she said.
Purnima Tanuku, executive chair of the National Day Nurseries Association (NDNA), said the government's ambitions 'will be put at risk if there is not sufficient investment in early years'.
She added that 'almost 70 per cent of nurseries told us that staff shortages mean they cannot offer the children's places they have room to deliver'.
Munira Wilson, the Lib Dem education spokesperson, said providers had been left 'hanging by a thread and parents [are] facing the prospect of childcare deserts'.
'The government need to ensure that the funding for childcare hours matches the actual costs of delivery,' she said.
Official statistics released last week showed a 7.2 per cent increase in early years staff, the largest annual rise since the series began.
The Department for Education would not be drawn on where any extra money might come from.
But Ms Phillipson insisted she was unafraid of the policy's popularity. She urged families to check what they are entitled to, adding: 'I want as many parents as possible to take up the offer. It allows parents to juggle work and family life, but it also sets up children to succeed. And the demand that parents are showing is a good problem to have, because it also brings economic dividends as well.
'If people are able to work, or work a few more hours… that helps us all as a society as well and it gets economic growth going.'
Ms Phillipson has previously warned that, as the policy expands again in September, parents in the first wave might not get their first choice of nursery.
Asked if she could say that all parents who want a space would get one, she told The Independent: 'What I can't guarantee is that it will be as close to home as they would like or it will be their first choice, but we're confident that the rollout will go well in September.'
Ms Farquharson did add that the higher uptake of free childcare could ultimately be a good sign for the economy, even if it is more expensive in the short-term.
'This higher uptake might mean that we're getting a lot more parents moving into paid work because of these entitlements than first predicted,' she said. 'If the goal for this policy is to drive growth, then this would be a fantastic success story.'
However, the extent to which that is the case will only become apparent over the next few years, she said.
A DfE spokesperson said: 'High-quality, affordable childcare plays a vital role in our Plan for Change, which is why early years funding will rise to over £9bn next year, helping us meet our target of getting tens of thousands more children each year ready for school.
'We're backing families with this record investment including a £75m grant this year to support providers in delivering more places and a 45 per cent uplift in early year pupil premium, building on the real difference this is making for families as highlighted by the Coram survey who say costs for some has halved.'
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