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Increasing childcare affordability would boost economy and society

Increasing childcare affordability would boost economy

A near fully-funded childcare system would significantly boost the economy through increased workforce participation and would be an important step towards gender equity in the workplace and society, a KPMG Australia report published today finds.

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The report, The Child Care Subsidy: options for increasing support for caregivers who want to work, sets out two proposals to make childcare more affordable for parents and carers.

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 pa, in additional CCS expenditure (net of additional income tax receipts that would flow from the increased workforce participation).

An additional cumulative benefit to GDP would arise, 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. KPMG estimates that over 20 years this could add up to $10bn to GDP.

The second option is a less costly interim measure, involving the elimination of per-child subsidy caps, and an increase in the maximum subsidy for the lowest income families. KPMG estimates the annual GDP benefit of this policy option is $5.4bn, at a cost of $2.5bn pa (again, net of additional income tax receipts).

Alison Kitchen, KPMG Chairman, said: “Affordability of child care looms as one of the key issues facing working parents as we look to rebuild the Australian economy through COVID. Too often, those who want to contribute more to household income find themselves looking at an insufficient financial reward from taking on extra work, once out of pocket child care costs are deducted. This occurs across all family income levels, as our modelling shows.”

“A near fully-funded childcare system would be a big step towards gender equity both in the workforce and society, as the unequal burden of care responsibility, borne mostly by women, has significant adverse consequences. Women’s needs and ability to reach their capabilities can get left behind and they often suffer a substantial long-term disadvantage in terms of earning capacity, ownership of assets and superannuation balances. The increased social and cognitive development of the children attending the additional days of childcare is also an important consideration,” she said.

Under the CCS, in place since July 2018, the federal government provides support for families by subsidising up to 85 percent of the cost of child care, but there are still significant out of pocket costs.
 

Income quintile Average annual out of pocket cost of child care ($) Average percentage of family’s after-tax income spent on child care
Bottom quintile (family income up to $67,000) 2,764 7
Second quintile (family income from $67,000 to $92,000) 2,824 4
Third quintile (family income from $92,000 to $137,000) 4,663 5
Fourth quintile (family income from $137,000 to $198,000) 7,774 6.5
Top quintile (family income over $198,000) 12,453 6.5

Out of pocket costs for families using paid child care across the income quintiles – from KPMG report

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 concept has been identified by KPMG as the Workforce Disincentive Rate (WDR) in its previous papers in a series on gender equity. This new study – the fifth in the series – 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 is actually worse off if this person works additional hours.

Grant Wardell-Johnson, Lead Tax Partner, KPMG Economics & Tax Centre, said: “Given the current federal budget position, a near-fully-funded childcare system may not be achievable in the shorter term. So in this context we recommend consideration of an interim stage where the Child Care Subsidy is 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. This would provide families with a higher level of assistance than is currently generally the case and bring long-term benefit for our society in both a financial and non-financial sense.”

The features of this second policy option are:

  • Maximum CCS increases to 95 percent of the hourly rate cap.
  • The phase-down of CCS based on family income commences at family income of $80,000 (up from the current $68,000). 
  • CCS would then decrease by 1 percentage point for every additional $4,000 of family income until the family received only a 30 percent subsidy. This would be the minimum subsidy. 
  • The annual per-child cap, the cause of WDRs in excess of 100 percent, would also be eliminated.

For futher information

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

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