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The case for further investment in the child care subsidy

Further investment in the child care subsidy

Enduring norms regarding gender and work have proven harmful to our economic welfare by sidelining the careers, and limiting the potential, of women across the income spectrum. In the latest of a series of reports which aim provide ideas to cut Australia’s workforce participation gap between men and women, KPMG proposes targeted amendments to the child care subsidy (CCS) to help alleviate the burden that these norms continue to have on our economic potential.

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Quantifying the challenge – the Workforce Disincentive Rate (WDR)

KPMG’s report, Unleashing our potential – the case for further investment in the child care subsidy, makes proposals to reduce what we call the Workforce Disincentive Rate (“WDR”) in the cases where it presents the most extreme deterrent to a primary carer – most often the mother – taking on additional days of work.

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the percentage of income from taking on an extra day’s work that a primary carer loses to income tax and Medicare levy, withdrawn family tax benefit, reduced child care subsidy and increased out-of-pocket child care costs.

For example: a woman 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 She might currently lose 88 percent of the income by working that fourth day – $6,200 in income tax and withdrawn family tax benefit and $4,800 in additional childcare costs for two children (net of CCS).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.

But under KPMG’s preferred proposal, she 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.

How can we address this, and what are the impacts?

Our preferred option, which could boost annual GDP by almost two times what it would cost in net additional government expenditure, would be to cap the WDR at the primary carer’s marginal income tax rate, plus 20 percentage points. This would progressively benefit lower income household situations where a combination of high child care costs and the phase-out of family tax benefits can otherwise move the WDR towards 90 percent or more. Our report explains how this would work, and how it would benefit the economy even with a modest uptake in additional workdays by primary carers.

Another initiative to address the highest WDRs would be to provide more assistance to families with more than one child in long-day care. These households experience a relatively high WDR, as the CCS reimburses a maximum of 85 percent of the child care costs for each child, and can therefore be under the most stress in terms of making ends meet. This would involve increasing the CCS to 100 percent (up to a maximum of the CCS’s capped hourly rate) for all households, regardless of income for the second (and any additional) child in simultaneous long-day care.

If we aspire to have equal workforce participation and leadership progression we must ensure men and women are equally empowered, socially and financially, to share the care-giving role.

By alleviating the cost of child care, targeted spending can remove a major barrier facing primary carers 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.

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