Unleashing our potential: the case for further investment in the child care subsidy

Enduring norms regarding gender and work have proven harmful to the economic welfare of women, and our society as a whole. These norms limit our economic potential and compromise our sense of fairness by sidelining the careers, and limiting the potential, of talented women.

Over the last 18 months KPMG has produced a series of thought papers identifying gender equity issues and making proposals for change. We have now collaborated with Chief Executive Women on our latest paper, Unleashing our potential – the case for further investment in the child care subsidy, that takes a detailed look at childcare – a key issue we need to improve if Australia is to reduce its stubbornly high workforce participation gap between men and women.

In the report we outline actions that can be taken which would boost GDP, with benefits outweighing the cost of the additional spending.

First, a quick recap. In our first report in the series, KPMG calculated over a 20-year period Australia’s national cumulative living standards would be raised by around $140 billion if the participation gap could be halved from 10 percentage points in 2017 to 5 percentage points. So no-one can doubt the financial importance of the problem.

But it is not just economics. Much of this participation gap relates to the unequal burden of care responsibility that is borne by women.  It has important social consequences, which arguably affect our society more deeply than just the economic outcomes.

Most particularly, the needs and ability of the primary carer to reach her or his (usually her) capabilities can get left behind and become absorbed in the concept of family.  The individual needs of the person can become invisible.

This is not to deny that women (and men) can gain very considerable personal benefits from giving to the family.  But an individual’s welfare must be an end in itself.  A primary carer’s realisation of her or his capabilities should not be sacrificed or considered secondary to the broader happiness of a family.

The manner in which Australia’s tax and transfer system works, with some components based on family income rather than individual income, has the effect of creating very high work disincentives for primary carers. In our second report in the series, we defined this as the Workforce Disincentive Rate (WDR) – a measure of the deterrent facing primary carers (normally women) wanting to work more hours.

The WDR is the percentage of income from taking on an extra day’s work that a primary carer loses to income tax and Medicare levy, withdrawn family tax benefit, reduced child care subsidy and increased out-of-pocket child care costs.  We identified that in some cases this can top 100 percent – so families could actually be financially penalised if a mother increased her work days to more than 3 a week. Others, especially at the lower end of the income scale – barely gained at all by working more days.

A key objective of the Commonwealth Government Child Care Subsidy (CCS) introduced in July 2018 is to better support parents’ participation in the workforce.  While the CCS has improved the financial position of many families, instances where the WDR exceeds 70 percent or even 100 percent still occur too often.

For example: a healthcare worker earning $50,000 and working 4 days a week has a marginal day’s income of $12,500. She might currently lose 88 percent of the income by working that fourth day – $6,200 in income tax and withdrawn family tax benefit and $4,800 in additional childcare costs for 2 children (net of CCS). So she would currently keep just $1,500 of the $12,500 earned by the fourth day’s work each week over the year.

So what can be done? In this new report we outline some solutions.

Our preferred option would be to cap the WDR at the primary carer’s marginal income tax rate, plus 20 percentage points. There would then be a top-up payment through the CCS system. This would benefit households across the income scale, but especially those at modest incomes who can least afford to be prevented from working more hours.

In the example above, that worker would keep almost 50 percent of the money earned by that fourth day’s work. Her WDR cap (marginal income tax rate plus 20 percent) would be 54.5 percent instead of the current 88 percent and she would receive a top-up payment of $4,188.

A financial services professional earning $120,000 over five days, by contrast, would under the current system have a WDR of 68 percent – so keeping 32 percent of the fifth day’s pay. Her WDR cap under our proposal would be 59 percent – keeping 41 percent of the money earned – with a top-up payment of $2,160.

These examples illustrate the meaningful, and progressive impacts of the proposal, which would similarly benefit those on incomes in between these two illustrative points. Higher earners have a higher WDR cap and their top-up payments would be capped at $10,000.

This is our preferred option. Our modelling indicates this could boost GDP by nearly $700m – with the economic benefit worth almost twice the additional costs in extra government spending – and generate almost 30,000 extra workdays for the economy.

We also repeat our call – first made in our second report – for the withdrawal of the current CCS ‘cliffs’ (an inherent fault in the system) that a family can fall off, when just one extra dollar of family income can cause that family to have its CCS cut by up to $5,000.  The cliffs can be replaced with further tapering of the rate of CCS as family income increases.

By alleviating the cost of child care, targeted spending can remove a major barrier facing mothers seeking to return to work. The reduction in WDRs that would flow from KPMG’s policy options to improve child care policy can therefore create a range of benefits for Australian society.

  • There should be a boost to productivity in the economy from encouraging women from across the whole spectrum of experience, qualifications and skill to increase their workforce participation.
  • The workforce participation gap between men and women should narrow, as the majority of primary carers impacted by the new measures would be women.
  • The gender pay gap should shrink as increased female workforce participation leads to increased opportunity and acceleration in the development of skills.
  • The gender superannuation gap should also narrow, as with every additional hour worked by primary carers, predominantly women, their superannuation balances would grow.

As a society we should be prepared to invest this money to promote positive change in social frameworks, particularly as this change can also produce immediate and enduring economic benefits.

Read the full report. Unleasing our potential: the case for further investment in the child care subsidy


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