Election 2016: Childcare should be better for taxpayer and disadvantaged kids

by Jim Minifie

Published by Australian Financial Review, Thursday 9 June

Late in every financial year, 100,000 families find their cash flows crimped as their childcare subsidies run out. So in this end-of-financial-year election, it should be no surprise that Labor is offering to boost childcare subsidies to match the plan on offer from the Coalition. But are these offers just more middle-class welfare?

Over the past decade, real federal and state spending on early childhood education and care has more than doubled. Federal spending alone has almost tripled to $7.5 billion. For 800,000 families, early childhood subsidies average almost $10,000 a year. Good early childhood policy helps women return to work, and helps kids learn and develop. On the downside, childcare subsidies move money from people who don’t have young kids to people who do.

Is there any reason to think Australia’s system achieves its goals at reasonable cost? The recent spending boost probably did draw more children into childcare, in part by increasing the quality of care. More than a third of children under five are now in formal child care at least once a week – up from about a quarter in 1999. But informal care (mostly by grandparents) has dropped as formal care expanded.

Still, the spending boost probably put some mothers back to work. Almost 60 per cent of mothers with children under the age of six are in the workforce now, up from 53 per cent in 2007. But much of the increase may not have been due to childcare policy: growing mortgages could well have given families stronger impetus to go back to work.

But the past decade’s spending increases largely went to offset huge rises in gross childcare fees of about 7.5 per cent per year in real terms. Those fee increases, in turn, were partly a response to the demand increases brought about by the subsidies. Other factors such as regulations that increased carer-to-child ratios, the need for higher qualifications, and rising costs and operator margins have also played a large role.

Finally, the jury is out on whether childcare subsidies have helped many children to develop. While there is strong evidence that quality early childhood education can really help disadvantaged children, today’s policy is not well-targeted to them. They remain less likely to access early childhood education than others, and many still start school far behind their peers and never catch up.

Overall, today’s childcare funding model moves a lot of money, but may not be the lowest-cost way to help women get back into the workforce or to support vulnerable kids to reach their potential. What of the changes proposed in this election campaign?

Compare the policies

Both main parties are proposing to lift spending on early childhood education and care subsidies by about 20 per cent (about $1.5 billion a year). Neither side plans to balance the books until at least 2020 so neither policy is fully costed.

That said, there are real differences between the parties’ proposals.

Childcare and early learning is supported through a “benefit” (a dollar amount for each hour of care) and a “rebate” for half of out-of-pocket childcare spending, up to a cap of $7500 a year. The Coalition, hewing close to the proposal the Productivity Commission made in 2015, would merge today’s two payments into one means-tested subsidy that will be capped to a per-hour maximum. It would also toughen the work or study test. Labor would keep today’s system, and simply boost the childcare benefit by 15 per cent and increase the rebate cap to $10,000.

So how do the policies stack up? First, the Coalition applies tighter cost pressure to childcare operators: caps on the per-hour subsidy will give parents a strong reason to shop around, while Labor would pay a fixed share of whatever childcare operators want to charge. Labor sensibly mandates price disclosure but its plan to give greater powers to the ACCC and education departments looks unwieldy.

Second, the Coalition appears to be somewhat better means tested. Some low-income families may pay as little as 15 per cent of gross childcare charges, while Labor’s plan could have them pay about 30 per cent. Labor’s subsidies, unlike the Coalition’s, are uncapped, though this will affect only the top couple of per cent of families by income.

Third, the Coalition planned “activity test” provides stronger work incentives, (assuming compliance with the test is audited). This could increase workforce participation.

Finally, on child development both plans have strengths and weaknesses. The Coalition’s work test may cut hours for kids from some of the neediest families, but its higher subsidies per hour could offset that. Labor offers a funding increase for children in indigenous and remote communities who are most in need.

Both major parties plan to spend big on childcare; both offer a lot of middle-class welfare, while neither offers much for the neediest children. Today’s disadvantaged kids – and tomorrow’s taxpayer – both deserve a more targeted scheme.