26
Apr
2021

Making childcare cheaper is imperative, but not all policies are equal

by Danielle Wood and Tom Crowley


Published in The Guardian, 26 April 2021

The federal government is hinting that more money might be on the table for childcare, either in the budget or later in the year. This is perhaps the first sign that the government is taking its pivot on women’s economic security seriously.

Cheaper childcare would narrow the lifetime earnings gap between men and women, and it would boost economic growth. That’s because childcare costs are the single biggest barrier to work facing single parents and primary carers (usually women).

More than half of parents who want to work more are prevented by a childcare-related problem, usually cost. Out-of-pocket childcare costs in Australia are indeed high by international standards: childcare absorbs 18% of household income for an average-earning couple with two young children, almost double the OECD average of 10%.

High out-of-pocket childcare costs combined with other tax and welfare settings are especially punishing for a second earner who wants to take on a fourth or fifth day of work. In a couple where both parents can earn $60,000 full-time, the primary carer would be working for only $2 an hour on her fourth day and for nothing on her fifth day.

Anything the government does to reduce childcare costs would be a step in the right direction. But not all options are equal.

The biggest boost would come from universal childcare, perhaps with a small co-payment. We estimate that a universal subsidy set at 95% of childcare costs would boost GDP by $27bn each year. But it would cost about $12bn a year, and so is unlikely to appeal to a government focused on restraining spending.

A more immediate option we have recommended would be to increase the Child Care Subsidy to 95% for low-income parents, flatten and simplify the taper rate for the subsidy, and remove the annual cap. Under this scheme, 60% of families would pay less than $20 a day for childcare.

We estimate this would cost about $5bn a year and boost GDP by about $11bn a year. Higher workforce participation for women would also reduce the $2m gap in lifetime earnings between men and women by about $150,000. Federal Labor announced a similar policy in its budget reply last year, albeit with a maximum rate of 90%.

Another big step in the right direction would be to help families with several children in care, by making childcare free for the second and subsequent children. This would be cheaper ($3bn a year), and the economic benefit would be lower ($6bn a year) because it would help fewer families. But it would still reduce some of the worst workforce disincentives because families with multiple children pay the most for childcare.

One option the government should take off the table is making childcare tax-deductible instead of subsidised. This may be superficially appealing – it would rightly recognise that childcare is a work expense – but because the cost of childcare is so high, only about 10% of families pay enough tax to benefit. Most families would be worse off, especially low-income families. And even families who did benefit might struggle with cashflow, because they would have to wait until tax time to get their money back, rather than receiving it fortnightly as is the case under the current subsidy.

As long as the government avoids the tax-deductibility furphy and focuses on increasing the subsidy, any policy to drive down childcare costs would be welcome. Changes to the Child Care Subsidy should be accompanied by a review of the hourly rate cap, and an ACCC market study of the childcare sector to identify any barriers to competition that might prevent the benefits from higher subsidies flowing to parents.

The government’s apparent willingness to act is a good sign: in its previous budget it failed to do anything material to reduce women’s economic disadvantage.

The recent appointment of Australia’s first minister for women’s economic security is also welcome. It is an overdue recognition that the lifetime earnings gap – and subsequent insecurity for so many women – is a major economic policy issue that warrants the government’s attention.

Supporting childcare is the single biggest policy lever the government has to address women’s economic disadvantage. But it’s also an important economic reform. And for a government looking to support women and grow the economy, this is a policy that deserves to take centre stage.