Final Report: Detailed Analysis
F4. Child care assistance
Assistance to access high-quality and affordable child care is important to the workforce participation of parents, providing them with the means to support and provide opportunities for their children. This is particularly important given the expected large increase in the dependency ratio — the number of people aged 65 and over per 100 workers — due to population ageing. All societies will need to ensure that the tax and transfer system does not unduly discourage workforce participation, particularly for parents returning to work after the birth of a child. The availability of affordable child care is more significant for women's than men's participation, given that women still undertake a greater role in caring for children in the home.
Access to quality child care also plays a role in early childhood development, particularly of children from families experiencing, or at risk of experiencing, social exclusion.
Australian families are increasingly balancing work and family responsibilities. The workforce participation rate of secondary earners, who in most cases are women, has risen steadily over the past few decades. Between 1982 and 2007 the participation rate of mothers with a youngest child aged 0 to 4 years increased from 29 per cent to 51 per cent. For mothers with a youngest child aged 5 to 9 years the rate increased from 51 per cent to 75 per cent. Of mothers in paid work prior to childbirth, 74 per cent return to work within 18 months of the birth, although mothers on lower wages are less likely to return to work within 18 months than those returning to average or higher-paying employment. Many mothers returning to work do so through part-time employment (Productivity Commission 2009b). These trends are broadly consistent with experience in other OECD countries.
As noted in the discussion on family assistance (see Section F3 Family and youth assistance), the value of parental care of children relative to the value of parental attachment to the workforce varies with the age of the child. Parental care is particularly important when the child is very young. The Productivity Commission's report on paid parental leave found that for the first six months it is significantly beneficial for the child and the mother to be together at home, with a reasonable prospect that longer periods (of up to 9 to 12 months) are also beneficial (Productivity Commission 2009b).
The OECD (2007c) notes that longer absences from the workforce can influence a mother's longer-term employment prospects. In this period, connection (or reconnection) with the workforce can become important. A system that supports parents to balance caring responsibilities with participation is important to social and economic outcomes for parents and their children.
For parents who need to use child care in order to work, child care is a cost of employment. The costs of child care may mean that parents receive minimal financial returns from returning to work in the short term — even though the long-term gains for parents, children and society more broadly from continued engagement with the workforce are much greater. Providing assistance so that parents can access good quality and affordable child care can help overcome these barriers to workforce participation.
The role of child care in early childhood development is a contested area of research and public policy debate. Much of the evidence is drawn from studies conducted in North America that focus on extensive interventions targeted at specific groups, including children from families with very low incomes.
While noting these caveats, the broad conclusions from the literature are that the quality of care makes a significant difference to outcomes and that children aged over two years experience positive outcomes from quality child care (although very long hours in care may be detrimental). For younger children, the outcomes are mixed and depend heavily on quality of care, hours in care and the home environment (that is, poor home environments mean better comparative outcomes for those children in child care).
Access to quality child care is particularly important in supporting the development of children from families experiencing, or at risk of experiencing, social exclusion. This can include children from jobless or low-income families, Indigenous children, children from minority cultural or linguistic backgrounds and children with a disability. For such children, evidence suggests that quality child care can lead to significantly better outcomes than no child care (COAG 2009). Making child care available to these children can not only assist their development and help them adjust to school, it can also help their parents take advantage of opportunities for economic and social participation.
Child care assistance should aim to facilitate workforce participation of parents and to support the development of children, particularly those from disadvantaged backgrounds.
Funding parents versus funding providers
Government assistance with the costs of formal child care could be delivered by directly subsidising child care providers (including government-owned providers) or by providing payments directly to parents (consumers of child care). In the current system, the majority of assistance is provided to parents (or on behalf of parents) through a voucher-like payment.
There are a number of advantages to this approach. Providing parents with the resources to access child care services allows parental needs to drive where child care centres are established and the type of care available. The government does not have to determine where child care centres should be located or which ones should receive additional funding. Providing funding directly to parents allows for better targeting of assistance to particular groups of parents and children based on their individual characteristics.
Subsidising child care providers directly can be appropriate where the costs of establishing and running centres are so high that even after assistance to parents has been provided, a market does not emerge; or where there are strong social benefits to children or parents. For example, providing subsidies to providers may be appropriate in geographically remote areas.
While parents are usually best placed to decide how much and what type of child care is best for their children, there are some aspects of the quality of child care and its impacts on child development that parents may not be able to assess as well as government regulators. The choices parents make about child care therefore need to be combined with appropriate quality standards. Governments are best placed to make decisions about mandatory qualifications for child care staff and about health and safety standards for centres. They are best able to gather, assess and distribute information on service provision and, where necessary, adjust standards.
Higher-quality standards increase the costs of child care and consequently the participation choices of parents. It is therefore important that the benefits of setting standards are clear and outweigh the impact that higher costs will have on the ability of families to access child care.
Child care assistance generally should be provided as transfers to parents (or on behalf of parents) rather than subsidies to child care providers. Governments have a role in setting quality standards and ensuring that good information on child care services is available to parents.
To facilitate workforce participation and improve early childhood development, parents and children in different circumstances will require different amounts of assistance.
For low-income families, assistance with the cost of child care plays a significant role in facilitating workforce participation, a key factor for some families in breaking out of the cycle of poverty. This suggests that relatively more assistance should be provided to families with lower incomes.
Even at higher income levels, however, the tax and transfer system impacts on the benefits of working relative to the benefits of not working (including the choice to care for children at home). The current system includes a number of biases against paid work because of the taxation of wage income, the removal of benefits as income increases and the availability of government payments as a substitute for paid work.
The combination of these objectives suggests that the amount of child care assistance should be higher at low income levels and means tested as income increases, but that a base level of assistance should be provided across the income spectrum to facilitate participation. Given the policy rationale of providing assistance to facilitate participation, the base level of assistance should be provided with a participation requirement — that is, on the condition that single parents or both parents in couple families are participating in work, education or training.
For low-income families in particular, there is an additional objective of enhancing child development, and some child care assistance should be provided without a participation requirement. The number of hours of assistance available without a participation requirement should be limited. This could, for example, be set with regard to the number of hours available of universal pre-school that are available.
Assistance to parents could be provided as a transfer or as a tax deduction — recognising that child care is a cost of employment. Providing assistance as a tax deduction would not always assist low-income families, as many are not taxpayers and, where they are, the delay in assistance would significantly reduce the benefit of the assistance. For low-income families, assistance therefore needs to be provided as a transfer payment.
In terms of administration and compliance costs, it is likely to be simpler to provide assistance through a single mechanism in the transfer system, rather than through a tax deduction and transfer payment — although the rates of payment should be set with reference to the value that a tax deduction would provide.
A separate question is whose income should be used as the basis of the means test: should it be the combined family income or the income of the secondary earner? While the combined family income is a better proxy for a child's social circumstances, it is the secondary earner's work decisions that are likely to be impacted to a greater extent by child care costs.
Application of a family income is consistent with means testing arrangements for family payments and could be applied for child care. If a base rate of assistance was provided, a family income means test would still ensure that low-income secondary earners could receive some level of assistance, regardless of primary earner income. A measure of taxable income should be used as the basis for assessment (consistent with family payments).
While it is important for low-income families to be able to access quality and affordable child care, it is appropriate that they make at least a small co-payment towards the cost of child care. The existence of a price signal reduces the risk of parents taking up child care places when they are not needed.
In some circumstances, particularly for at-risk or vulnerable children with multiple disadvantages, it will be appropriate to cover the full costs of care to actively encourage the use of child care. It would not be appropriate to provide this rate of assistance based on family income alone: better measures of disadvantage may come from the health, community services or child protection systems. Other special circumstances (including grandparents caring for children and children in foster care) will also warrant non-means tested support.
Higher levels of child care assistance should be provided to low-income families. To recognise that child care costs are a cost of producing income, a minimum universal level of assistance should be available.
Child care assistance is more effectively provided through the payments system rather than through a tax deduction. Assistance should be means tested using a measure of family taxable income.
Requiring at least a small co-payment for low-income families reduces the risk of parents taking up child care places when they are not needed. In some cases, particularly for at-risk or vulnerable children with multiple disadvantages, it may be appropriate to cover the full costs of care.
<< Previous Page – F4: Child care assistance