Cheaper childcare is a win-win-win policy

Making childcare cheaper has always been good policy – but in the current economic environment it solves problems with all the deftness of a busy working mother.

First to the cost of living. Almost all households are feeling a squeeze from higher prices for food, petrol and housing. But the squeeze is particularly tight for the 1 million families with children in formal care. Out-of-pocket childcare costs have grown on average by more than 3 per cent a year above inflation over the past decade, the second-fastest-growing component of the consumer price index over that time (only tobacco has grown faster).

Reducing out-of-pocket childcare fees directly reduces costs for households. And this flows through to inflation. In a world where the Reserve Bank is concerned about “inflation psychology” – where people’s expectations that prices will continue to rise triggers the dreaded wage-price spiral –anything that brings down that headline inflation figure is very welcome.

Second, labour shortages. Signs of the tight labour market are everywhere: unemployment is at a 50-year low of 3.9 per cent, under-employment is falling, and workforce participation is at an all-time high. “Help wanted” signs litter cafe widows and shortages of key workers in health and education are making the headlines.

But we have a big group of workers who are trained, ready, and eager to work but are sitting on the sidelines because of the prohibitive out-of-pocket costs of childcare. Tackling these costs would release a pressure valve for the labour market.

More than one-third of mothers work in the healthcare, social assistance, education or training industries. We could effectively boost the number of teachers, nurses, childcare educators and aged care workers overnight, relieving significant shortages.

Finally, cheaper childcare could be a long-term shot in the arm for our nation’s sluggish productivity, which has been flatlining since the global financial crisis. Australia currently ranks equal first globally for women’s education but 70th for women’s economic participation. This means there is an awful lot of talent we aren’t tapping into. Enabling women who want to participate more in the labour market to do so would deepen our pools of talent and boost national productivity.

The other productivity benefit is longer term but even larger. High-quality, structured education benefits children’s development, particularly children from disadvantaged households. The years before school are crucial for cognitive and emotional development, building social skills, and for later academic performance. With Australia’s school education results declining, and the gap between disadvantaged and advantaged students widening, affordable access to early learning will help boost educational performance and opportunity.

Making childcare cheaper is a rare win-win-win policy: it helps to relieve short-term cost-of-living pressures and medium-term labour shortages, and it contributes to a long-term vision for productivity growth.

The good news is the new government has a policy to tap into these benefits.

Its $5.4 billion package over four years to boost the base rate of the childcare subsidy from 85 per cent to 90 per cent and reduce the extent to which subsidy is withdrawn as family incomes rise should deliver sizeable benefits for families and the economy. Grattan Institute estimates suggest a “typical family” in terms of income with a single child in care should be several thousands of dollars a year better off.

Similarly, it should boost labour supply. We estimate the package will result in 8 per cent more hours being worked by second-earners with young children. This works out to about 220,000 extra days worked in Australia every week, mostly by mothers who are currently working part-time increasing their hours.

The bad news is the policy isn’t due to come into effect until July next year, meaning it won’t help in the period when some of these economic challenges are most acute. The Minister for Early Childhood Education, Anne Aly, has indicated the government will contemplate fast-tracking the policy.

But beyond timing, the minister’s other challenge is to make sure the policy is well-designed, so it delivers the promised economic benefits.

This means addressing staff shortages by tackling the problem of chronically low pay in the sector.

It means ensuring that the higher subsidy actually hits the pockets of parents, rather than being siphoned off by childcare providers. So the government should consider stronger price caps for providers, and ensure the Australian Competition and Consumer Commission keeps a close eye on prices when the subsidy increases.

And it means working with the state governments – particularly the enthusiastic NSW and Victorian governments who have been busy rolling out their own policies – to make sure the respective packages complement each other, including in plugging availability gaps, rather than complicating the system further.

The cheaper childcare policy comes with a degree of difficulty, but if the new government can pull it off, it is a three-for-the-price-of-one in tackling some of our most pressing economic challenges.