Lower income families to win in childcare reforms

By Leith van Onselen

The Productivity Commission (PC) will today publicly release its long awaited final report into Childcare and Early Childhood Learning,  which will recommend tighter means testing of benefits such that families earning less than $130,000 a year will be better-off, but those earning significantly above this threshold will be worse-off.

The PC will also recommend redirecting more of the $7.7 billion now spent in childcare subsidies to lower and middle income families, but will still leave all families receiving some benefits.

Specifically, the PC will recommend introducing a tiered system as follows:

  • families earning more than $250,000 a year would receive 20% of their childcare costs from the government, compared with around 40% currently;
  • families earning between $160,000 and $200,000 a year would receive 40% of their costs paid, a slight reduction on their current situation; but
  • moderate income families earning between $80,000 and $100,000 would be much better-off, receiving 65% of their childcare costs as a subsidy; and
  • low income families earning less than $60,000 would receive 85% of their costs back.

The PC’s calculations are based on a “benchmark” cost of childcare, rather than actual costs, which may be higher or lower. This is designed to keep a lid on fees.

In crafting its package, the PC stated that the greatest dollar subsidy per hour goes to families who pay the most, which are typically those on higher incomes and sometimes for luxury or premium services.

It also recommends allowing parents to use their subsidy either at a childcare facility or on suitably qualified nannies.

The PC believes that the new structure would slow the rapid growth of childcare subsidies, which now cost taxpayers $7.7 billion, and could be implemented without any additional funding.

However, it does not believe that the reforms would significantly raise female labour force participation, with its modelling indicating that female participation would be increased by 1.2%, or by 16,400 extra workers, boosting growth by around $1.3 billion in the first year.

Overall, the PC’s recommendations strikes the right balance, without raising costs to taxpayers.

Targeting incentives at lower income families is sensible, seeing as it is lower second income earners that face the highest effective marginal tax rates from paid work, whereas those on higher incomes are less effected.

Extending childcare subsidies to nannies also offers many benefits.

First, it would enable a family with multiple young children to make their subsidy stretch further than sending each child to childcare, potentially saving the taxpayer money whilst also improving workforce participation (by making working more profitable).

Second, it would improve flexibility, providing shift workers that work outside traditional childcare hours with enhanced access.

Finally, it would free-up traditional childcare places, opening up these spots to others, whilst also potentially placing downward pressure on fees.

To its credit, the Government is amenable to the PC’s reforms, which hopefully means that meaningful change will occur in this area.

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