Universal childcare just another losing bluff

The Productivity Commission has rejected the case for universal childcare. Picture: Getty Images

There is a strong rumour going around that universal early childhood education and childcare – let’s call it universal childcare – will form the centrepiece of Labor’s bid for a second term in office. It will be Anthony Albanese’s legacy.

The key idea is that there should be a very low flat fee for all parents with children attending childcare centres. This is notwithstanding the fact that the Productivity Commission, which was commissioned by the government to investigate the topic, has rejected the case for universal childcare. It is too expensive; it favours high income earners; and the benefits are unclear, particularly in terms of higher female labour force ­participation.

It’s worth running through some of the background to assess the case for universal childcare. The labour force participation rate of mothers with children aged under 15 increased by 12 percentage points between 2009 and 2023, to reach 80 per cent. This was mostly due to the higher participation of mothers with young children aged between 0 and 4 years. Over this time, the share of mothers working full-time rose from 40 per cent to 50 per cent. (The participation of fathers remained consistently high.)

Of course, there are several reasons for these trends, including the sheer financial necessity for most families to have two incomes. With the high and rising cost of housing as well as other living expenses, most mothers have no choice but to return to work reasonably quickly after the birth of a child to sustain the family’s financial position. That said, in an ideal world, some mothers might make other choices such as staying home or part-time work to spend more time with their young offspring.

We have some indication of this preference because only 60 to 70 per cent of the childcare hours that the government pays for, and to which parents contribute, are used. It is not uncommon for one parent (or grandparent) to pick up a child early in the knowledge that excessively long hours spent in a childcare centre aren’t good for the child. This under-utilisation also illustrates the inherent inflexibility of centre-based care with its set hours.

Children attending childcare centres are also very prone to pick up infections, which they then often pass on to parents. This similarly limits attendance. It is relatively common for mothers to receive calls from the managers of childcare centres to pick up their unwell child as soon as possible.

Over time, there has been a trend towards centre-based care away from family-day care and informal arrangements. The most common arrangement for children aged 0 to 4 is now centre-based care, in part because this is where the subsidies are. Virtually all the growth in childcare places over the past decade has been in centres owned by private providers. It’s worth noting here that unionisation is only possible for centre workers.

The Productivity Commission assessed two alternative changes to the subsidisation of childcare fees: a flat fee (say $10 per day) for all parents and a tiered arrangement with low-income households facing no charge but the rate of subsidisation falling as income rises. Evidently, the first option is the preferred alternative of Albanese, following the Canadian model first pioneered in Quebec.

The PC report contains estimates of the impact of these two options on female labour force participation. Let’s be clear, the impact is trivial in both cases – essentially zero. It is slightly higher in the case of the flat fee option but only by 7000 more jobs. Bear in mind, normal monthly increases of 50,000 in the number of jobs are not uncommon.

The fact is that most parents are already working at full-tilt and any change to the subsidy arrangements has negligible effects on hours worked although there is some substitution of informal care for centre-based care.

While the impact on workforce participation may be inconsequential, the effect on the budget bottom line is substantial. Even the PC’s preferred option is estimated to cost another $4.7bn per year on top of $14bn currently being paid out as childcare subsidies. The flat fee version would cost an extra $8.3bn per year. (The cost of subsidising the wages of childcare workers which was announced recently by the government is on top of these figures.)

Given the pressures on the federal budget, you might think that the Albanese government might hit the pause button immediately. The fact that the PC got it so wrong about the cost of the NDIS is a further consideration. It’s not clear that the estimates of the additional costs of the two options are very reliable.

In rejecting the flat fee model, the PC argues that while it “would generate a somewhat stronger (but still small) labour market response from parents”, it comes at a “much higher additional cost to taxpayers”.

Importantly, it wouldn’t be equitable because “a disproportionate share of the increased government support would go to the families whose incomes are in the top 25 per cent of the income distribution”.

This is surely a killer point; it’s not clear why Albanese would support this option unless he regards it as vote-winner in inner city seats which could fall to the Greens.

There is also the vexed issue of where the additional childcare places would come from in response to the induced extra demand – estimated to be around 10 per cent. The reality is that childcare is another industry plagued by supply problems, including a shortage of suitably qualified workers.

Much is made in the PC report of the underrepresentation of disadvantaged children in formal childcare and how the activity test serves to dissuade some parents from enrolling their children. To qualify for the subsidies, an activity test must be met which includes paid employment but also training/education, looking for a job and volunteering.

The argument is that those on above average incomes already meet the activity test, but its existence prevents disadvantaged children with low-income parents from attending childcare. These children might benefit greatly from the structured arrangements of centre-based care.

To my mind, the activity test provides the correct messaging – to receive these subsidies, parents should be expected to participate in activities that generate income and/or improve their prospects. Given the breadth of the test, I would be inclined to leave it well enough alone.

The history of government involvement in childcare over recent decades has been a sorry one, akin to the squirrel in the cage. Each year more money is spent on subsidising childcare fees, but the fees then rise strongly, eating up any gains to parents. This in turn leads to political pressure to further up the subsidies. Government outlays on childcare fee relief have gone from under half a billion dollars per year at the turn of the century to over $14bn per year now, not including the cost of subsiding the wages of childcare workers.

The proposal for a low flat fee subsidy arrangement – call it universal childcare – is deeply flawed. It is prohibitively expensive, unfair and ineffective. But if providing ‘‘free’’ stuff is seen as means of winning elections, it will continue to hold some attraction for some politicians. It could be Albo’s legacy – just not a good one.