Labor’s plan to cut childcare costs is a big deal
Published by the Australian Financial Review, Tuesday 14 May
At a time when governments are struggling to boost economic growth, Labor’s plan to reduce childcare costs for working families could have a big impact. In fact, it’s likely to produce a bigger bang for each dollar spent than the tax cuts proposed by either of the major parties.
Grattan Institute’s Commonwealth Orange Book 2019 identified boosting female workforce participation as one of the most valuable economic reforms.
Female participation in the labour force is lower in Australia than in similar countries, and Australian mothers are far more likely to work part-time.
That’s because motherhood hurts female participation more in Australia than in other countries. Before having children, Australian women are just as likely to work as men. On having children, many drop out of work and some never go back. Those who do often pay a career penalty.
Childcare is the highest hurdle. More than 40 per cent of Australian women who would like more work say caring for children and its cost are the main reasons they can’t take on more hours. Of course a number of other factors also affect mothers’ workforce participation decisions, as the Productivity Commission has noted.
Women with children get little financial reward for entering the workforce, and even less for working more hours. As they work more hours, they lose more family and childcare benefits and also pay more income tax. Factoring in the cost of childcare itself, some find working more hours costs more than it pays.
These effective marginal tax rates for second-income earners are much higher than the headline tax rate paid by people earning more than $180,000 per year.
Under Labor’s proposal, childcare will become free for families with incomes of up to $69,000 a year, up to the hourly cap of $11.77 an hour, or $118 a day for 10 hours care.
Just as importantly, families on higher incomes up to $174,527 a year would pay a smaller share of their childcare costs than they do today. For families earning between $69,000 and $100,000, the government would cover up to an extra 15 per cent of their childcare costs. Those earning between $100,000 and $174,527 would save an extra 10 per cent on their childcare costs.
The savings per extra day worked would be substantial.
Consider a middle-income family with two children in childcare: a primary earner bringing in the average full-time wage of $95,103 in 2020-21, and the other choosing how many days a week to work in a job that would pay the median full-time wage of $61,000.
Labor’s plan would increase the reward for working an extra day a week by about $1,260 a year. It would give the second earner an extra 10¢ out of every extra dollar earned.
It’s a big deal. And the empirical evidence suggests that women caring for young children are more sensitive than others to effective marginal tax rates. As a result, Labor’s plan is likely to significantly increase workforce participation, and therefore economic growth.
Some aspects need more work. Labor plans to cut the subsidy suddenly from 60 per cent to 50 per cent for families with incomes above $174,527. The cliff will distort incentives to work for second-earners in some wealthier families, because they’ll instantly have to pay a lot more for childcare – about $5,000 a year more – the moment their household income climbs a dollar over $174,527.
A better approach would be to gradually reduce the subsidy rate from 60 per cent for incomes of $174,527 to 50 per cent for incomes above $205,000.
Labor will also have to be careful to ensure its higher subsidies don’t simply result in childcare centres jacking up their prices. The existing cap on childcare subsidies of $11.77 per hour will limit any childcare fee increases. But Australians paid an average of just $9.20 per hour in 2018.
Labor says it will ask the Competition and Consumer Commission to crack down on fee increases. Past attempts to use the ACCC to police prices, such as during the introduction of the GST and the carbon tax, had mixed success. But overall, much of the increased subsidy is likely to be passed on to parents.
Labor’s proposed reforms to childcare subsidies should not be confused with its plans to spend $10 billion of taxpayer funds to boost childcare workers’ wages. Such a direct grant to boost private sector workers’ wages is unprecedented, is the wrong way to solve the problem and is sure to have unintended consequences.
But in an election campaign full of giveaways and short on serious economic reform, Labor’s proposed change to childcare subsidies is the most important economic news so far.