Increasing childcare affordability would boost economy and society

Australia needs a rebound in economic activity, and productivity gains to bring us out of the recession – and a major impediment to driving our economy is unequal gender workforce participation.

The COVID lockdown has highlighted just how important childcare provision is to working parents, particularly mothers, who have wrestled with trying to work at home, while looking after pre-school children.

KPMG’s own Victoria office has seen an 84 percent rise in carers leave requests during the period of Stage 4 lockdown – a proof point if any were needed on the importance of childcare.

Today we publish a report recommending some changes to the funding of the childcare system and we have found that short-term investment now will pay rich economic and social dividends in years to come.

The Child Care Subsidy: options for increasing support for caregivers who want to work is the fifth paper in our series examining gender issues in the workforce but is the first since the COVID pandemic – which has added extra urgency to the need for reform, given the economic slowdown  has hit lower earners, mostly women, hardest.

We have identified two options – a preferred longer-term plan and an interim stage to get there, given the difficult financial position the federal government now faces.

The first option outlined is raising the Federal Government’s Child Care Subsidy (CCS) to a nearly fully-funded 95 percent, from its current 85 percent, which the study shows would boost the economy annually by up to $7.4bn, at a cost of $5.4bn in additional CCS expenditure (net of additional income tax receipts that would flow from the increased workforce participation).  This, we believe, should be our long-term goal.

An additional cumulative benefit to GDP would arise from this option, as parents increased their career-long productivity by being able to strengthen their engagement with work and professional development while their children are very young. Our modelling estimates that over 20 years this could add up to $10bn to GDP.

The second option – and a more realistic interim measure given its lower cost – involves the elimination of per-child subsidy caps, and an increase in the maximum subsidy for the lowest income families. We estimate the annual GDP benefit of this policy option is $5.4bn, at a cost of $2.5bn (again, net of additional income tax receipts). Helping the worst-off must be the immediate priority.

A major issue explored in the report is how the CCS interacts with the income tax and family tax benefit (FTB) systems – and it highlights how the progressive withdrawal of CCS and FTB and the subsequent increase in marginal tax rates can combine to create large disincentives to a parent working more hours.

This issue we have defined as the Workforce Disincentive Rate (WDR) – and our modelling confirms that while the current CCS has improved the financial position of many families, others continue to face WDRs topping 100 percent – meaning a family can actually be worse off if a parent works additional hours. The WDR problem affects people across the income scale.

The interim option we recommend will see the CCS modified to eliminate the ‘cliffs’ inherent in the current system – where just one extra dollar earned could cause a household to lose up to $5,000 of subsidy.

Childcare is a barrier we have imposed on our economy and society – we firmly believe that Australia could cross a productivity frontier if we could remove that barrier. The study shows that annually an estimated additional 200,000 extra workdays per week could be unleashed by a near-fully-funded childcare system. This is why it must be our long-term goal, even if we have to get there in stages.

We have to start seeing childcare subsidy not so much in the prism of costs (as difficult as that is in the immediate circumstances) but as an investment in the ability of parents, especially mothers – given Australia’s historic ‘1.5 model’, where men work full-time and many women part-time – to maximise their contribution to the economy, according to their needs and preferences.

Australia is currently considering various stimulus measures to boost our COVID-impacted economy. Increasing productivity by boosting childcare support should be right up there.

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