The Government was warned its extension to the 20-hours-free early childhood education policy in this year’s budget was “low value for money” and was offered an alternative that would do more to reduce fees for parents.

Documents released by the Government today show Treasury warned the proposal to extend the policy to 2-year-olds was “relatively low value for money” and would “not automatically mean reduced fees”.

Treasury explained the policy would mean services may not charge fees for the 20 hours but, without further restrictions, services could require attendance beyond the daily six hours covered by the policy and then charge a high daily or hourly fee.

“Services may use subsidy increases to raise profits or invest in service quality,” the advice from Treasury said.

 “Services already know that whānau are prepared to pay existing fees and the ECE market is not particularly competitive in many places. It may be difficult to directly compel services to pass on any subsidy increase to whānau dollar for dollar.”

Instead, Treasury suggested the Government increase the current 20-hours-free subsidy rate and “require services to offer 20 genuinely free hours for 3 to 5-year-olds”.

That would mean providers would no longer be able to require parents to enrol for more than the free hours and “do more to reduce fees for parents than the proposed universal extension to 2-year-olds”.

An increase to the current subsidy rate would be needed to mitigate the viability risk for childcare providers that would come with that requirement.

Treasury estimated a 2 per cent increase would be enough and cost $90 million over the period instead of the $800m the extension to the scheme announced in the budget was forecast to cost.

But, the Government went ahead with the extension for 2-year-olds and put in place a requirement which meant providers would not be able to insist children were enrolled for longer and charge a high rate for those extra hours.

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Prime Minister Chris Hipkins was forced to back down on part of the Government's early childhood Budget promise. Photo / Mark Mitchell

However, the Government was forced to back down on that requirement after uproar from early childhood providers who said it would not be financially viable to provide free hours for 2-year-olds at the subsidy rate that had been announced without being able to make up the shortfall elsewhere.

Announcing the u-turn Prime Minister Chris Hipkins said the intention of the 20-hours-free early childhood education initiative was to lower the cost for parents, not to have an impact on services’ financial position.

“We’ve removed the specific funding condition that would require services to take enrolments for 20 hours only, when they were requested by parents to do so.

“That update fulfils our promise of extending 20-hours-free ECE to two-year-olds, and increasing 20-hours ECE funding rates by 4.6 per cent, but it also removes a complication that was going to make it too difficult for services to do that in a financially viable way.”

Hipkins said centres would still have to charge by the hour, but they would be able to bundle that with the 20 free hours.

The other aspect of the Budget announcement, that service providers would have to make clear to parents any additional fees they would be receiving, remains.

National’s Early Childhood Education spokesperson Penny Simmonds said the advice released today showed the Government knew the policy would not necessarily mean lower fees.

“Officials cautioned Labour that their policy is untargeted and low value for money,” Simmonds said.

“Labour’s flagship policy of Budget 2023 has been a shambles from the beginning and they have already been forced back to the drawing board after the policy was slammed by the vast majority of the ECE sector, calling it ‘completely unworkable’.

National’s Early Childhood Education spokesperson Penny Simmonds called the Government's early childhood education promise a shambles. Photo / Bevan Conley.

National was instead proposing a Family Boost childcare rebate which would see a rebate of up to 25 per cent of early childhood expenses, up to a maximum of $3900 a year, go directly to parents.

Simmonds said their policy would allow parents to keep more of what they earn.

Associate Minister of Education Jo Luxton, who is responsible for early childhood education, has since responded.

"This a policy that will make childcare more affordable for families. We’ve put $1.2 billion over four years towards funding this extension for 2-year-olds. These are subsidies that will directly benefit families. We know that any parent with a 2-year-old in ECE will see an average cost savings of $133.20 per week. For those doing it tough right now, that's a real and meaningful difference.

We expanded this policy to 2-year-olds so even more families could be supported. Choosing to invest only in the existing 3-5 year old subsidy may help increase cost savings for those already benefiting from the policy, but we knew there would be many parents who would then miss out entirely on any cost relief. As many Kiwis are doing it tough right now, creating a more inclusive policy was more of a priority for our Government. We did increase the overall rates for the 20 hours subsidy by 4.6%, so all age groups will still experience a boost in funding.

The one condition we changed with this policy was the requirement for services to offer 20 hours only to parents. After listening to feedback from the sector, we decided to remove this condition given concerns that it may impact the viability of some services. Our conditions around fee transparency still remain in place, including that all fees be charged only by the hour. This will allow parents to have clear and consistent information on ECE services, so they can make more informed choices about what option works best for them financially."