Childcare subsidies: Christian Porter’s balancing act

Childcare is a classic example of provider capture. While the policy of subsidising and regulating formal childcare is ostensibly about assisting working parents and children from disadvantaged backgrounds, in practice childcare has become a bloated, inflexible boondoggle providing superior capital returns for investors.

Not so long ago, the commonwealth government spent less than $1 billion a year on childcare; it is now $7bn a year and rising. In the meantime, childcare fees have increased rapidly.

It is nigh on impossible to find long daycare for less than $100 a day, before subsidies, in any of the capital cities. Indeed, in some inner suburbs of Sydney and Melbourne, the cost is heading towards $200 a day.

Now the federal government would have us believe it has come up with a solution to fix the various childcare problems — excessive cost, lack of availability and inflexibility. The problem of gross over-regulation is rarely mentioned. Although the government is aware this is an issue, the relevant ministers continue to play into the hands of the big operators who increasingly call the shots.

Where did it all go wrong? And how do we assess the government’s dubious and profligate proposals to change the system of childcare funding? (By the way, relying on the Productivity Commission’s appalling report on early childcare and early childhood learning — you have to get with the lingo — just doesn’t cut it.)

It’s worth revisiting some history. One of the reasons the system of childcare went off the rails was the reluctance of the NSW government under premier Bob Carr to invest in the provision of preschool education at the same rate as the other states and territories. It was much simpler to regulate childcare by insisting on higher staff qualifications, lower staff ratios and educational content. In this way, a lot of preschool education could be provided at childcare centres rather than at dedicated preschools.

But once these more stringent regulations were in place in NSW, other states felt pressured to follow suit, with the lobby groups representing long-day childcare centres leading the charge.

Further pressures emerged to create uniform regulations across the country and hence the National Quality Framework emerged, eagerly embraced by the Rudd-Gillard government.

The impact of the NQF, which has been phased in across several years, has been to push up childcare fees well above the rate of inflation. During the six years that Labor was in office, childcare fees increased by more than 50 per cent.

So what does the federal government have in mind to deal with childcare? Before I outline the initiatives, it needs to be borne in mind that a strict trade-off has been established by the government, reinforced by recently appointed Social Services Minister Christian Porter, that the additional funding to childcare ($3.5bn across four years) will ahead only if savings can be achieved in respect to changes to family tax benefits.

The combined savings of these changes is close to $5bn across four years, and include freezing the indexation of all family tax benefits for two years; reducing the family income limit for Family Tax Benefit Part A to $94,000 a year irrespective of the number of children; cutting out FTB-B when the youngest child turns six; and limiting FTB-B to families with combined incomes less than $100,000 a year (rather than the present $150,000 a year).

The trouble is that the modified changes passed by the Senate add up to savings of only $1.8bn across four years, leaving a serious shortfall in funding the new childcare package. The outstanding question is: will the government proceed with its revamped childcare package, Jobs for Families, which is due to begin in 2017-18?

The first thing to note about the proposed new childcare package is the sheer expense of the initiative — $40bn across four years. A consolidation is being proposed of the two present fee relief components — the childcare subsidy and the childcare rebate.

It is estimated that families with combined incomes between $65,000 and $170,000 a year will be $30 a week better off as a result of the changes (which looks like pretty small beer for such an expensive initiative). Families on very high incomes (more than $250,000 a year) will have their subsidy rate cut from 50 per cent to 20 per cent, although a higher rebate cap will advantage this small group. As part of the deal, childcare fees will be subsidised only as percentage of a reference price, quoted presently as $110 a day. Given that very many parents in Melbourne and Sydney already pay more than this, there are likely to be many more losers than the government is estimating.

This is sure to be a major sticking point and highlights the difficulty of rolling out sensible national policy, as well as the inherent inflationary effect of government childcare subsidies.

Another aspect of the deal is the insistence that parents meet a strict activity test (work, training, job search) to qualify for the subsidy. Whether the test will be implemented effectively is a moot point; there is an activity test that presently applies to the childcare rebate that is widely gamed.

The noisy childcare operators dislike this aspect of the policy and are quick to conflate the advant­ages of formal childcare for children from disadvantaged backgrounds (these children actually participate at very low rates) with the benefits for other children. The government is correct to insist on an activity test for the vast majority of parents, but it needs to be effective.

On balance, it is hard to get too excited about this new childcare policy, although Education Minister Simon Birmingham has been right to point out the absurdity of long daycare being available only in full-day blocks rather than on an hourly or half-day basis. The sums of money are just too great and there is no serious consideration being given to winding back the over-regulation of the sector.

My suggestion is to start again and aim for something cheaper, simpler and more flexible.