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Unleashing our potential: remove the disincentives for full time work

A radical plan to revamp Child Care Subsidy

A radical plan to revamp Child Care Subsidy (CCS) could help parents back to work and boost GDP by close to $700 million – with the economic benefit worth almost twice the additional cost in extra government spending – a new report by KPMG shows.

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Almost 30,000 additional workdays per week could also be generated for the economy

The paper, Unleashing our potential – the case for further investment in the child care subsidy, is the latest in a series of KPMG reports which aim to provide ideas to cut Australia’s workforce participation gap between men and women. The report was prepared in collaboration with Chief Executive Women (CEW).

The report addresses the problem caused by the interaction of Australia’s tax and transfer systems. With some components based on family, rather than individual, income this has the effect of creating very high work disincentives for secondary earners. KPMG has defined this as the Workforce Disincentive Rate (WDR) – a measure of the deterrent facing secondary earners, more often women, wanting to work more hours.

While the current CCS has improved the financial position of many families, others continue to face WDRs topping 100 percent – meaning a family is actually worse off when this person works additional hours.

Alison Kitchen, KPMG Australia Chairman, said: “Our main proposal is to cap the WDR at the secondary earner’s – usually a woman – 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.”

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 She might currently lose 88 percent of the income by working that fourth day – $6,200 in income tax and withdrawn family tax benefit and $4,800 in additional childcare costs for two children (net of CCS).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

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 KPMG’s plan 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.

Alison Kitchen added: “In addition, we repeat our previous call for the withdrawal of the current CCS ‘cliffs’ that a family can fall off, when just one extra dollar earned could cause that family to lose up to $5,000 of subsidy. This is an inherent quirk in the system and could be addressed by replacing the cliffs with tapering of the rate of CCS as a family’s income increases.”

As an alternative proposal to capping the WDR, the report suggests that more assistance could be provided 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, which can cause a significant financial burden.

KPMG’s secondary proposal is that for the second (and any additional) child in simultaneous long-day care, the CCS should be increased to 100 percent (up to a maximum of the CCS’s capped hourly rate) for all households, regardless of income. This would represent an improvement on the current situation, although would be a less targeted, and more cautious initiative than capping the WDR.

Grant Wardell-Johnson, Partner, KPMG Economics & Tax Centre, said: “Without a major shift in the public policy philosophy underlying taxpayer funded child care subsidies, these workforce disincentives, currently falling predominantly on women, will persist. Given Australia’s weak productivity performance, it is crucial that we make better use of the skills and experience of many parents who have taken time out of the workforce to bring up children.”

“Our economic modelling in this report shows the proposals would generate an additional $678m – using conservative assumptions – at a cost of $368m in extra CCS spending. The support the proposals give to closing the workforce participation gap will also contribute to reducing the current gender pay and superannuation gaps which women experience.”

Sue Morphet, President of CEW, said: “Increased affordability of child care can be a key enabler of greater parental equality in our society. Enduring norms regarding gender and work have proven harmful to the economic welfare of women, and our society as a whole.”

“Reducing financial disincentives for parents seeking to work full-time is paramount. 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 income-generating and care-giving roles.”

Alison Kitchen agreed: “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.”

For further information

Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au

Marjorie Johnston
KPMG Communications
0407 329 430
mjohnston4@kpmg.com.au

Lisa Jervis
Chief Executive Women
0491 217 564
ljervis@cew.org.au

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