Childcare package neither bold or sustainable

Prime Minister Tony Abbott and Social Services Minister Scott Morrison hope the government’s childcare policy will encourage more Australians to enter or re-enter the workforce. Paul Miller/AAP

The government’s new childcare package, which will not come into full force until July 2017, tinkers around the edges.

The package will simplify the benefits system, increase subsidies for those on lower incomes, and extend subsidies to include nannies. Subsidies are now linked to “benchmark” prices in an effort to reduce inflationary pressures, a decision that could actually be detrimental to parents in the longer term. Bold policies such as universal early childhood education and care (ECEC) or a radical improvement in the quality of ECEC are not the order of the day.

The government says its objective is to help parents who want to work or work more. The relationship between childcare policies and women’s labour supply is an area I and the University of Canberra’s Xiaodong Gong have extensively researched.

There are a number of reasons why governments might subsidise childcare, not as a handout, but as a sensible policy tool. One reason put forward is that it will pay for itself — subsidies to childcare result in more women working and the increased tax revenue will more than offset the cost of the subsidy.

A second reason is that investment in ECEC yields improved educational outcomes for children, resulting in better-educated, more productive and happier citizens. If credit constraints or lack of information lead to under-investment in education, then there is a role for government intervention.

A third reason is, in a society where women have traditionally borne the burden of care for young children, childcare subsidies help women enter and remain in the work force. So, childcare is a crucial pillar in any set of policies designed to enhance gender equality in society.

Do these arguments stand up in Australia?

Will childcare subsidies pay for themselves? No. Based on Australian data from the late 2000s, each dollar of subsidy returns only about $0.14 of tax revenue. So a dollar of subsidy, after taking account of increased work hours of mothers, costs about $0.86. And this excludes government costs of program administration. These estimates are based on small changes to the currently existing program of childcare benefit (CCB). Might responses to radical changes to the childcare system be really different? Probably not, but it’s not impossible. Without data to inform, the hopeful can continue to speculate.

Is subsidising childcare worth it?

Determining whether money spent on childcare is “worth it” in terms of educational outcomes and women’s equality is harder to answer. While these outcomes have value, they don’t come with a price and reasonable people can disagree about their worth.

We know from overseas that participation in childcare appears to help educational outcomes, particularly for children from lower income families. For middle- and upper-middle class families, the results are mixed with some studies saying that childcare attendance can actually be harmful for future educational outcomes relative to children staying at home with a well-educated carer.

In Australia, there are no broad, representative studies. The few existing, observational studies do not convincingly address the problems that arise from unobserved differences between those children who attend childcare and those who do not. Some studies find small positive effects of ECEC whereas others find either no effect of childcare attendance or a slight negative effect on teacher assessments of children’s knowledge or year 3 NAPLAN tests. We need more evidence in this area.

What about gender equality? This is difficult to quantify satisfactorily, but what is clear across developed countries is a general pattern where countries with free or heavily-subsidised ECEC have higher fertility rates and higher labour force participation by women. It’s hard to identify the “childcare” effect, as such policies are often bundled with a wide set of policies aimed at supporting gender equality and broader choices for both women and men when it comes to balancing work and family.

The likely impact of the new policy

Women from lower-income families tend to respond more to childcare subsidies than those from wealthier families. This is not surprising, as childcare represents a larger share of the household budget for poorer families. So positive labour supply effects should ensue from tilting subsidies towards those who are less well off.

While simplification sounds good, childcare is an area where having two policy levers is valuable. Our research shows that responses to subsidies (like CCB) are very different than responses towards tax rebates — like the original childcare tax rebate (CCTR), which actually was a tax rebate, not a subsidy under a different name. Tax rebates are less expensive (a dollar of rebate only costs around $0.73) and produce larger labour supply increases. However, the wealthier (with taxable income and higher marginal tax rates) benefit more from tax rebates. This suggests a policy where subsidies are targeted at lower-income families and an across the board tax rebate is (implicitly) targeted at wealthier families.

It is unclear what effect the linking to benchmark prices will have. We do not know much about the supply side of childcare - to what degree do subsidies simply flow on as higher prices? How will these benchmark prices be adjusted over time? Childcare prices have increased at a faster rate than inflation over the last 15 years, so failing to index the benchmark prices or indexing them only to a broad measure of inflation will, over time, result in substantial real decreases in support to families.

Nannies are not the answer

It is difficult to see how a policy of subsidising nannies fits into this. This part of the policy will not pay for itself for the same reasons that no childcare subsidy pays for itself. The research about ECEC benefiting children is based upon classroom interactions and integration into the educational process not segregation with a nanny.

We do not know whether children cared for by nannies do better or worse at school than those who have stayed home with a parent; nor how their performance rates against those who have been in long day care.

Australian ECEC continues to suffer from quality issues, despite the National Quality Framework. The typical childcare worker has qualifications and teaching skills well below those of the typical preschool or primary school teacher. The typical nanny will have no job-specific educational qualifications and less training than the typical childcare worker.

Will we allow long day care centres to hire less qualified workers than they now do, call them “nannies” rather than “childcare workers” and still have access to subsidies? Subsidising nannies looks more like an appeal to a particular demographic rather than a well-thought out attempt to improve outcomes for children.