The coalition's cuts to early years education are storing up problems for the future

By neglecting the early years we risk having to spend more playing catch-up later on.

If the Spending Round was supposed to protect education, the Chancellor’s calculations didn’t add up. By ignoring early years, what sounds like good news for schools could end up being bad news for education outcomes.

The schools budget is one of the few that has been protected from cuts – not just in cash terms, but in real terms. But by ring-fencing schools funding, other areas of education will take a much deeper hit. Rather than an across the board cut of 1 per cent, this will be concentrated in early years, early intervention projects and further education colleges, who now face more than a 4 per cent cut in their budgets.

In the pre-spending review negotiations, Nick Clegg fought to maintain the government’s commitment to rolling out childcare to 2-year-olds in low-income families. So it could have been worse. Small mercy. From an educational development perspective, it makes better sense to prioritise funding in the early years than to spend more on playing catch-up later on. The first years of a child’s life are a crucial period of rapid development. We know high quality childcare has the potential to boost children’s development (both cognitive and social), and, most importantly, we know high quality early years has the greatest positive impact on those children from households with lower levels of income and education.

And disadvantage starts young. At 18 months, children of parents with lower income and lower levels of formal education are already scoring substantially lower in development tests than their colleagues, and these gaps typically widen. Our early years sector has been instrumental in helping narrow this gap, less than half of children from a Free School Meal background are deemed to have a "good level of development" at five. This either means less privileged children are getting left behind when they start compulsory education or schools have to invest far more money tackling the gap later on.

The early years sector is struggling and further cuts will only exacerbate the problem. Many providers are already unable to cover costs of delivering the free entitlement – and this has been worsening in recent months. Four out of ten nurseries that offer free places for two-year-olds do not receive enough funding to cover their costs. The average shortfall (£1.19 per hour) works out as a loss of £678 per year, per child. In the south of England it’s even worse, at £1,208. For the three and four-year-old places, 8 out of 10 nurseries in England are unable to cover their costs, losing £700 per year per child.

So the further cuts to local authorities and early years are going to cause serious problems. The costs can’t be absorbed by providers – a quarter of providers made a financial loss in the previous year, and salaries are already extremely low, with the average full time childminder earning just £11,400 a year.

If the costs can’t be covered by the sector, providers will either face closure or will need to push the prices up. But parents already pay comparatively high prices for childcare, and family incomes are already being squeezed by the fact the costs of living rising quicker than pay.

By neglecting the early years we risk having to spend more playing catch-up later on. The Spending Round verdict? Great for schools, but tough on toddlers.

David Cameron is pictured during a visit to a London Early Years Foundation nursery in London. Photograph: Getty Images.
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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation