Childcare sector awaits reform plans as nurseries struggle to make ends meet

Just over a year ago, three-year-old Thomas Hall would not speak. He would not play with other children or follow adults' instructions. Now he can't stop chattering. At Christmas his parents watched with tears in their eyes as their previously ungovernable child stood proudly alongside his classmates, dressed as an angel.

It was, says Thomas's father, Charles, a heart-wrenching moment. "If Thomas had carried on along the path he was heading, by the time he got to school his behaviour might have become too embedded to change," he says. "I can envisage him being written off as the naughty boy at the back of the classroom."

Charles attributes the change to the work of staff and specialist practitioners at the Northend nursery in Erith, Kent, a charitable organisation managed by the Pre-School Learning Alliance. "It's the sheer amount of skilled, one-on-one attention he's received that's done it.

"But the nursery didn't just focus on Thomas: they spent many hours with his mother and me too, teaching us what we can do. Now, because our home is a happier, calmer place, we can start paying proper attention to Thomas's little brother. The nursery hasn't just transformed the life of one little boy, it's changed the lives of a whole family."

Next week the government is expected to make announcements that could revolutionise childcare. Everyone agrees it is not before time. Childcare in the UK is among the most expensive in the world, costing an average of 27% of parental income, compared with 13% in Europe and 5% in Sweden.

Despite the expense, British childcare fails where it is most needed. Three-quarters of providers are rated by Ofsted as good or outstanding, but it is children in the poorest areas of the country who receive the worst care.

According to the Sutton Trust, an educational charity, the UK has one of the biggest gaps in "school readiness" between the richest and poorest four- and five-year-olds, based on the top and bottom 10%. Children from the poorest homes are, on average, nearly 19 months behind children from the richest homes in vocabulary tests. (That compares with 14.5 months in Australia and 10.6 months in Canada, countries that have similar levels of inequality to the UK but greater social mobility.)

Early years providers and experts are waiting on tenterhooks for the announcements. There are two pending: the government response to Professor Cathy Nutbrown's official review of early education and childcare qualifications in England; and the deliberations of David Cameron's commission on childcare, tasked with devising a way to reduce the cost.

Nutbrown's report, Foundations for Quality, called for all nursery staff to have A-level-standard professional qualifications and better maths and literacy skills. It was widely welcomed by an industry in which 14% of the workforce is educated to graduate level, and which struggles to attract and retain high-quality workers.

Nutbrown was not asked to price her 19 recommendations and, according to figures obtained this week by Labour through freedom of information requests, finances are moving in the other direction. There have been substantial cuts, Labour discovered, to the funding available to train childcare staff.

Figures for 136 local authorities show that money available was slashed by 40% in a year, from £93m in 2010/11 to £56m in 2011/12. In four areas – Redcar and Cleveland, Enfield, Solihull and Lewisham – there is no money for councils to provide nursery staff training.

Causing more angst are hints dropped this week by the Conservative MP Elizabeth Truss about the conclusions of the childcare commission she has led with Steve Webb, the Lib Dem pensions minister, including possibly changing staff-to-children ratios in childcare settings, cutting red tape and creating wrap-around care from 6am to 6pm, as happens in Germany.

Talk of changing ratios is controversial. Under current legislation there is one carer to every three children up to two, 1:4 for toddlers aged two to three, and 1:6 for three- to four-year-olds.

In a piece for the ConservativeHome website, Truss wrote: "We need to think about the balance between the number and quality of staff in our system. It is no coincidence that we have the most restrictive adult-child ratios for young children of comparable European countries as well as the lowest staff salaries."

Truss has praised the French écoles maternelles system that offers traditional nursery-style teaching in large groups of three- and four-year-olds, with each staff member responsible for up to eight toddlers.

For struggling nurseries, being able to reduce staff numbers should be welcome. Staff salaries account for around 70% of nurseries' costs. But the reaction from providers has been anything but positive. In a survey by the Pre-school Learning Alliance, 94% of respondents said they did not believe they would be able to maintain their current quality of service if staffing levels were reduced.

Respondents also said having fewer staff would not necessarily reduce the financial burden on parents. "Very few respondents indicated that they would adjust their charges accordingly, arguing that the additional revenue would go part‑way to addressing the historic inadequacy of funding," said Neil Leitch, chief executive of the alliance.

A yet-to-be-published report by the National Childminding Association, seen by the Guardian, says almost two-thirds of childminders agree that looser ratios would compromise the safety of children in their care.

A closer look at the foreign systems that Truss lauds is revealing. According to an independent report from the Economist Intelligence Unit last year, the quality of childcare was worse in France than the UK, and costs were higher.

At the Northend nursery, when asked to imagine the consequences of new staff-child ratios, the manager, Josie Lait, shakes her head. "The current ratio makes it hard enough already to give children quality one-on-one attention," she says. "Around half our children have been referred to us by the health authority, which means they have behavioural problems, but the other half deserve individual attention too."

"If the ratio is loosened, we would find it very hard to give children like Thomas the time they need. I have to admit that if the ratios are loosened, I would be tempted to defy them."

Truss has hinted she wants to deliver money to frontline services. Currently, the government ploughs about £5bn a year into childcare and early years provision. The Department for Education says the average profit for a nursery is £13,600, but many are doing far worse, with dozens on the brink. Lait says Northend has not made a profit for two years.

Where the money goes is a mystery the government cannot answer. It's not going on wages: nursery staff take home a salary that barely hovers above minimum wage and even a graduate early years professional takes home only half what a qualified teacher does.

Part of the problem is that the cash allocated for free entitlement to 15 hours of childcare for three- to four-years-olds is passed down by central government as part of an overall grant funding all "educational functions" offered by each local authority. Within this Dedicated Schools Grant, however, there is no specific ring-fencing for early years provision. The result in 2006/7, according to a 2008 report by Manchester Business School, the last time this issue was examined, was a shortfall of £912m – or 24.7% of the £3.6bn budget – between the funding that central government estimated was required by early years providers and the funding that actually reached their coffers on the frontline. As local authorities struggle to fund their full educational remit in the teeth of ever-deeper funding cuts, experts fear early years providers will find themselves receiving an ever-smaller slice of the overall pie.

Another reason providers are struggling is that these cuts are being implemented at the same time as local authorities are being asked to do more, such as extend free childcare entitlement to all two-year-olds. This year in the London borough of Bexley, early years settings have been told to expect a 15% cut to their funding.

It seems unlikely that Truss will opt for directly funded services, as in France. At the Daycare Trust conference she voiced her support for a "name and shame" approach towards councils. "I'm urging local authorities to make sure this funding is passed on to providers," she said. "We'll be publishing the actual amount every local authority has passed on, on the department's website next year, so parents and providers will be able to compare rates across the country and hold authorities to account."

Next week – probably – announcements will be made and the uncertainty will be swept away.

In Kent, however, it will be too late for 28-year-old Katie Hawkins, the lead practitioner who helped Lait set up Northend nursery.

Hawkins has a three-year degree and early years practitioner status. She says she has been passionate about working with children since she was a child. But now she is leaving. "I earn half of what my friends earn as teachers, even though I have the same levels of qualification as them," she says. "I still live with my parents, because I can't afford to move out. I don't feel my work is respected or understood: my friends, and even some parents here, just assume we spend our days playing with babies, and treat us accordingly."

She adds: "It's incredibly depressing because I love what I do. But I owe it to my future to take a break and take stock. I need to find something that pays me a living wage and that I know is respected. Doing what I do now, I'm never going to be able to move on with my life."