Last week, the Morrison Government flagged that next week’s federal budget would boost childcare funding by $1.7 billion over three years, representing a 6% lift on current expenditure levels.
The policy will have two main components:
- Dropping the annual cap of $10,560 per child for families earning over $189,390, which is perceived as a major disincentive for women with high earning partners; and
- Boosting the subsidy for second and subsequent children in care by up to 30% (capped at 95%) for children aged under 6, in a bid to lower costs for families with multiple children.
The Grattan Institute has released a useful explainer estimating the impact of the changes:
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Let’s take a middle-income family with two young children paying average day care costs of $110 a day per child. They are currently eligible for a 60% subsidy for both children, so they pay $88 a day and the government pays $132. Under the new policy, the subsidy would rise to 90% for the second child, meaning they will in future pay $55 a day for both children and get a $165 subsidy. This family would be $132 a week better off if they have the children in care for four days.
Grattan also estimates the impacts on female workforce participation:
Currently, for families with two children in long day care, mothers can lose 80, 90, or even 100% of their take-home pay in the move to take a fourth or fifth days’ work, with childcare costs on those additional days being the main contributor. The new policy reduces the disincentives for those families.
As Figure 1 shows, in a family where the father earns $60,000 and the mother would earn the same if she worked full time, the second earner loses 90% of what she earns on her fourth day and more than 100% on the fifth day. Under the new policy, the workforce disincentive rates (WDRs) are lowered, so she will now lose 75% on the fourth day and 90% on the fifth day. The family will gain an extra $5,000 a year if the second earner works four days, or an extra $7,500 a year if she works full-time (Figure 2).
For a family where both parents have the potential to earn $100,000, current workforce disincentive rates of 100% on the fifth day would almost halve to 55% under the new policy. This is because the family benefits from both the extra subsidy for the second child and the removal of the annual cap.
Workforce disincentives remain high, even with the new policy – much higher than the top marginal tax rate at 45%, for example. But it is a significant improvement on the status quo.
Grattan also estimates that the Coalition’s policy is less ambitious than Labor’s, which removes the annual cap and also lifts the base subsidy (for all children) to 90% and reduces the ‘steepness’ of the means test taper. However, Labor’s policy would also cost $2 billion per year, which is around three times the Coalition’s policy:
Overall, Grattan rates the Morrison Government’s childcare policy as a step forward, but not a ‘game changer’:
Overall, the Coalition’s policy is a helpful and well-targeted package that tackles some of the worst out-of-pocket costs and workforce disincentives. It will mean a real improvement for about 270,000 families.
What’s missing is support for all the other families using childcare – just under 1 million families currently use childcare and many would like to work more if they could afford to do so.
Lifting labour supply by boosting women’s participation is a far superior policy to alleviate purported labour shortages than reopening the immigration floodgates.
It’s time Australia used its existing labour force more effectively than always reaching for foreign workers.