The federal government is pitching its 2021 budget as “women-friendly”. Yesterday it announced a key feature of that – more money to make child care cheaper and boost women’s workforce participation.
The Coalition’s policy will increase spending on the child-care subsidy from July 2022 by an extra A$1.7 billion over three years. That is about a 6% increase on the current investment of $9 billion a year.
The policy has two main components.
First, it drops the “annual cap” that limits the total yearly subsidy to $10,560 per child for families with combined income of more than $189,390. After that – generally if they have their children in care for four or more days a week – they pay the full cost of care. These costs are often a big disincentive for women with high-earning partners to work more than three days a week.
Second, it boosts the subsidy for second and subsequent children in care by up to 30 percentage points (capped at 95%). This means families currently eligible for a 50% subsidy would now be eligible for an 80% subsidy on their second child if both children are aged under six. Older children using after school care are not eligible for any extra subsidy.
This will reduce fees for families paying some of the highest out-of-pocket childcare care costs – those with multiple children in long day care.
So how does it work?
Consider a middle-income family where one parent earns $85,000 and the other parent earns $65,000, with two young children in day care paying the average cost of $110 a day per child. Under the current scheme they are eligible for a 60% subsidy for both children. So they pay $88 a day and the government pays $132.
Under the new policy, the subsidy will rise to 90% for the second child (with the first child still on a 60% subsidy). This means the parents will pay $55 a day for both children, and get a $165 subsidy. If they have the children in care for four days a week, they will be $132 a week better off.
Effect on workforce participation and family budgets
Currently, for families with two children in long day care, the primary care giver (typically the mother) can lose more than 80% – in some cases 100% – of take-home pay in the move to take a fourth or fifth day’s work. Child-care costs on those extra days are the main contributor.
The new policy reduces the disincentives for those families.
The first graph shows a family where the father earns $60,000 and the mother would earn the same if she worked full time. The current system means she loses 90% of what she earns on her fourth day and more than 100% on the fifth day.
The new policy will lower these “workforce disincentive rates”.
The mother will now lose 75% on the fourth day and 90% on the fifth day.
As the next graph shows, the family will be $5,000 a year better off if the second earner works four days, and $7,500 a year better off if she works full-time.
For a family where both parents have the potential to earn $100,000 working five days a week, the new policy will almost halve the current workforce disincentive rate for working a fifth day – from 100% to 55%.
This is because such a family will benefit from both the extra subsidy for the second child and the removal of the annual cap.
Workforce disincentives remain high even with the new policy. But it is a significant improvement on the status quo.