Child care

Policy analysis by Dr Barbara Broadway, Melbourne Institute

Children's stacking cups

Key Points

Two subsidies for parents’ expenses for approved child care services (such as Long Day Care and Family Day Care) are available to families:

  • The means-tested Child Care Benefit (CCB), which allocates funding based on a family’s income, how many children the family has and how old they are, and how many hours of child care the family uses. The subsidy is available for 24 hour/week or for 50 hours/week if an activity test is met.
  • The Child Care Rebate (CCR), which pays 50% of parents’ child care expenses up to a maximum of $7,500 per year, regardless of parents’ income and with a very minimal activity test.

Labor promises to:

  • Increase the Child Care Benefit by 15 per cent
  • Increase the cap on Child Care Rebate to $10,000/year

The Coalition promises to:

  • Combine the current Child Care Benefit and Child Care Rebate in one single payment. This new subsidy:
  • Pays a percentage of parents’ hourly child care expenses. This ranges from 85% for families with an income <$65,710 to 20% for families with an income >$340,000.
  • Applies to fees up to $11.55/hour; if actual fees are higher, only $11.55 are subsidised.
  • Is activity-tested: the more hours parents spend working, studying or in other related activities, the more hours of child care are subsidised.

The Greens promise to: 

Combine the current Child Care Benefit and the Child Care Benefit in one single payment. This new subsidy

Pays a percentage of parents’ hourly child care expenses. This ranges from 85% for families with an income <$65,000  to 20% for families with an income >$340,000.

Is not activity-tested: the subsidy is payable for 24 hours/week applies universally to all children.

What families can expect to get 

This depends in the first instance on whether they pass the different proposed activity tests. 

Labor wants to maintain the status quo by providing some subsidies to all children in order to support universal early education, and some additional funding to parents who are active in the labour market in order to facilitate parental employment. 

The Coalition wants to strengthen the link between labour market activity and child care subsidies, and thus remove subsidies for inactive parents. 

The Greens want to remove that link same link, and provide subsidies for early education for all children universally.

Once a family’s activity level qualifies them for a payment, the proposed policies have quite similar implications in terms of the amount of payments.

Labor’s proposal increases subsidies to relatively low-income households by increasing the means-tested CCB. Currently, the CCB tapers out for families with a combined income of about $150k to $170k (depending on the number of children). Families with an income below this threshold will benefit from the increase in CCB; the lower their income, the more they will gain compared to the current regime.

The Coalition and the Greens both propose to introduce a new payment that also channels higher subsidies to low-income households. A 50% subsidy is planned for families with an income of $170k; that is, families on that income would receive the same subsidy as under the old policy. Families with a lower income would receive a higher subsidy; again, the lower their income, the more they will gain compared to the current regime.

In addition, all three proposals feature changes to the maximum subsidy that can be received per year. This change is clearly long overdue, given that average child care costs have been rising steeply well above the overall price levels for a long time, while the cap on subsidies has been unchanged since 2008 even in nominal terms.

Labor wants to increase the annual cap on the CCR. 

The Coalition’s plan removes the annual cap altogether by not setting a cap for the new, single payment (except for high income families); however, the new subsidy is limited to maximum hourly fees and 50 hours/week; the Greens’ plan equally does not set an annual cap, but limits the subsidy to 24 hours/week. Whether the Greens’ and the Coalition’s implicit caps end up being higher or lower than the current annual cap or Labor’s proposed cap, depends on usage patterns and prices. However, in most settings, all three policies will pay higher subsidies to families that currently reach the limit of the CCR.

In total, all three parties’ policies have an element that channels funding to households with an income below about the same threshold, with the additional subsidy decreasing from the poorest households to those that just reach this threshold.  All three proposals also favour families whose total child care expenses exceed the current cap.  Without a detailed empirical analysis of household data, it is hard to determine for which families each of the proposals is preferable, and for most families the subsidies under all regimes would probably be roughly comparable – assuming that activity tests are passed.

Ideology underpinning the policy

Proposals regarding activity tests reveal broader ideological differences regarding the purpose of child care services across the parties.Here, the Coalition and the Greens show approaches more fundamentally different from each other, with Labor locating itself in the middle.

There are two main reasons why societies might agree to subsidise child care in the first place:

  • in order to boost parents’ (particularly mothers’) activity in the labour market, hoping for an increase in overall productivity, tax revenues, or women’s retirement savings. Increased female labour force participation is also seen as beneficial for gender equity;
  • in order to improve children’s outcomes in their social and cognitive development. Particularly disadvantaged children may benefit from quality early education, and subsidised access to such services is seen to ‘level the playing field’ and reduce inequality in education.

The Coalition

The Coalition makes a clear move towards linking subsidies for child care services to labour force related activity. Families that do not engage in a minimum level of labour-market related activity will not receive child care subsidies; higher levels of activity imply that more hours of child care usage will be subsidised. 

The Coalition clearly approaches the subsidy of child care services as a vehicle to enable parents’ labour market participation. The Coalition’s Nanny Pilot Program also reflects this approach. Under this pilot, families can receive (currently on a trial basis) child care subsidies when they use the services of a nanny, which is not usually approved for subsidies. Nannies do not need any child-care related qualifications; subsidising their services can only be justified by supporting parents’ labour market activity, but not by children’s educational needs.

The Greens

The Greens oppose a link between subsidised hours of child care and parents’ labour market activities: every child will receive 24 hours of subsidised care; parents’ activities do not enter the equation. With that proposal, the Greens firmly position themselves as proponents of child care as a public service meant to benefit the children themselves, the way schools do (which is not meant to free up parents for employment, but to educate children).

Labor

Labor wants to maintain the current activity test, which combines both positions. The means-tested CCB is paid for 24 hours/week for all children (regardless of parental activity), and for 50 hours/week if parents are active in the labour market. The non-means-tested CCR is paid with a very minimal activity test. It is hard to argue from a theoretical point of view why the means-tested CCB (which would be more effective in levelling the playing field) is also activity-tested, while the non-means-tested CCR is not; starting from the typical economical or educational reasoning behind child care subsidies, the opposite approach should apply. However, this is not suprising since Labor’s plan maintains the ‘historically grown’ structure.

Cost of the policies 

The Coalition and Labor both estimate their policy changes will increase expenditure on child care by $3billion over four years, to a total of $40billion.

The Greens estimate their policy proposal to add another 370 million per year or $1.5billion over the four-year period to the total bill, implying that on average, subsidies per family under the Greens’ proposal will be highest.

Image credit: Christina Kessler/Flickr