Budget Review 2021–22 Index

Michael Klapdor

The Budget includes two significant changes to the Child Care Subsidy (CCS) aimed at increasing workforce participation:

• increasing the rate of CCS for families with more than one child aged under six years attending child care and
• removing the annual cap on the amount of CCS that can be paid for families with incomes above $189,390.

The measures were announced prior to the Budget, on 2 May 2021, and will provide an additional $1.7 billion in payments over the forward estimates. The CCS changes are the major component of the Women’s Economic Security Package (p. 81) (see separate article in this Budget Review, ‘Women’s Safety and Economic Security’). The CCS measures will commence on 1 July 2022 and will require legislation.

Current Child Care Subsidy arrangements

The CCS is the Australian Government’s main program to assist families with the costs of child care. It commenced on 2 July 2018 and replaced two previous payments: Child Care Benefit and Child Care Rebate. An estimated $9.0 billion will be spent on the CCS in 2020–21 (p. 6-10).

The CCS is means tested with rates of payment based on family income, hours of care used, type of care used, and parents’ or carers’ level of work, training or study. The payment is paid directly to providers and delivered to families in the form of a fee reduction. An activity test determines the number of hours per fortnight a family is eligible to receive CCS. A maximum hourly amount payable via the subsidy is set by the Government (the hourly rate cap), with families receiving a percentage of this rate or the actual fees charged based on their income. Table 1 sets out how the current income test works.

Table 1: current Child Care Subsidy income test

Source: Department of Social Services (DSS), ‘3.5.1 CCS - combined annual ATI’, Family assistance guide, DSS website, 1 July 2020.

If a family earns more than $189,390 per year (and less than $353,680) then the total amount of CCS they can receive in 2020–21 is $10,560 per child—the annual cap. Families earning less than $189,390 per year do not face a cap. Families earning $353,680 or above cannot receive any CCS under the income test.

Enhanced Child Care Subsidy

The first component of the enhanced Child Care Subsidy will provide an increased rate of subsidy for families with more than one child aged under six years of age who are also attending child care. The CCS rate for eligible second and subsequent children will be the percentage amount worked out under the income test (Table 1) plus 30 percentage points up to a maximum of 95%. For example, where the second child would have been eligible for a CCS rate of 50% of the fee paid or hourly cap, they will receive a CCS rate of 80% of the fee paid or hourly cap.

The rate for the first child aged under six in child care will stay the same. Where two or more children are not aged under six years—for example, one child aged three and one child aged six—the family will not be eligible for the higher rate of CCS. Families with income over the higher income limit (currently $353,680) will remain ineligible for any CCS for any children.

Figure 1 compares the current and enhanced CCS rates with the Australian Labor Party’s proposed changes to the CCS’s design. The two policies offer very different approaches to improving child care affordability. In his 2020 Budget in reply speech, Opposition Leader Anthony Albanese proposed to increase the maximum CCS rate to 90% of the fee charged or hourly rate cap. The rate would gradually reduce by one percentage point for every $5,000 of family income above $72,406. Labor’s CCS design does not have an upper income limit and no annual cap, but the CCS rate reaches zero for families with an annual income of around $530,000. The policy costs an estimated $6.2 billion over four years.

Figure 1: current and enhanced Child Care Subsidy compared with Labor’s design

Source: Parliamentary Library estimates based on DSS, ‘3.5.1 CCS - combined annual ATI’, Family assistance guide, DSS website, last reviewed 1 July 2020; Department of Education, Skills and Employment (DESE), ‘Enhanced Child Care Subsidy’, DESE website, last modified 4 May 2021; Australian Labor Party (ALP), ‘Labor’s Cheaper Child Care Plan’, ALP website, n.d.

The Australian Greens have called for free child care, similar to the arrangements in place from 6 April to 12 July 2020 under the COVID-19 Early Childhood Education and Care Relief Package (pp. 7–9).

Who will benefit?

The Government estimates that 250,000 families will have lower out-of-pocket costs as a result of the proposed CCS changes. The 2020–21 Budget estimated 1.3 million families would be using child care services approved for CCS in 2022–23 (there were 904,710 families using child care services approved for CCS in the December 2020 quarter). This means that only around 20% of families using child care are expected to benefit from the proposed changes in 2022.

Families with multiple children in child care can have very high out-of-pocket costs. In couple-families, the high costs are a significant disincentive for the second earner to undertake work, or to work more than a few days per week. The combined effect of higher child care fees, lower CCS benefits, lower Family Tax Benefit payments and income tax can mean that there is little or no increase in family income when a second earner undertakes more work. Research by the Grattan Institute suggests some second-earners lose more than 80%—and sometimes 100%—of their additional earnings moving from three days of work a week to four or five days. The Grattan Institute found the budget measures will reduce these disincentives for many families but some will still gain only a small benefit from additional work.

Figure 2 and Table 2 compare the current, enhanced and Labor CCS models for a family with two children aged under six years in child care for four days a week. The enhanced and Labor CCS model provide the same increase in assistance for such a family where their income is under $70,000. A two-child family with income between $70,000 and $210,000 would be slightly better off under the Labor model, while those with income between $210,000 and $327,000 would be better off under the enhanced CCS. The Labor model does not have an income limit so the small number of families with very high incomes (around 2% of families according to the Department of Education, Skills and Employment, p. 33) are better off under this design compared to the current and enhanced CCS models.

For families with three or more children aged under six years in care, the enhanced CCS model offers a higher level of assistance to eligible families than the Labor CCS.

Figure 2: Child Care Subsidy rates per week under different models, family with two children aged <6 years in care

Notes: Based on a fee of $10.50 per hour, ten hours of care per day, for four days a week.

Source: Parliamentary Library estimates based on DSS, ‘3.5.1 CCS - combined annual ATI’, Family assistance guide, DSS website, last reviewed 1 July 2020; DESE, ‘Enhanced Child Care Subsidy’, DESE website, last modified 4 May 2021; ALP, ‘Labor’s Cheaper Child Care Plan’, ALP website, n.d

Table 2: weekly out-of-pocket costs of child care under different CCS models, family with two children aged <6 years in care

Notes: Based on a fee of $10.50 per hour, ten hours of care per day, for four days a week.

Source: Parliamentary Library estimates based on DSS, ‘3.5.1 CCS - combined annual ATI’, Family assistance guide, DSS website, last reviewed 1 July 2020; DESE, ‘Enhanced Child Care Subsidy’, DESE website, last modified 4 May 2021; ALP, ‘Labor’s Cheaper Child Care Plan’, ALP website, n.d

Issues and stakeholder response

A key issue for the enhanced CCS model is that it will add complexity to the system with different payment rates depending on the age and number of children in a family. One of the reasons for the introduction of the CCS was that it was simpler than the previous fee assistance system—then Social Services Minister Scott Morrison stated in 2015 that the child care sector and families had ‘screamed’ at the Government: ‘for goodness sake make this simpler, it is far too complicated’.

Early Childhood Australia, a peak body, welcomes the additional funding for child care. However, CEO Samantha Page noted that the changes ‘add complexity to an already complex system’. Ms Page also stated ‘we are disappointed that changes are planned to come in to effect in 2022, meaning many families currently using child care won’t have any relief’.

The Australian Childcare Alliance, which represents privately owned child care providers, commended the Government’s proposed changes. President Paul Mondo stated: ‘The removal of the annual CCS cap for many families and the increased support for multiple-child families are the sensible next step in providing greater work options for parents’.

Removing the annual cap on CCS for higher income families will reduce work disincentives. Administrative data quoted in one media report stated that around 200,000 families receiving CCS had income above the $189,390 threshold at which the annual cap applies. However, only around 18,000 of these families reached the cap each year. Some families may have chosen to reduce their use of child care, and therefore their working hours, to not hit the cap.

Another key issue will be how the policy interacts with early childhood education. Currently, children in standalone preschools are not eligible for CCS (preschool programs delivered through centre-based day care services are eligible). In 2019, around 87.7% of children attended preschool in the relevant state-specific year before primary school and 40.7% of children attended a program within centre-based day care (Report on Government Services 2021, Table 3A.17). Those children in preschool who are ineligible for CCS may make their siblings ineligible for the higher rate of CCS—as the enhanced CCS is only available where multiple children under the age of six attend child care services. This could create an incentive for families to move children from standalone preschools to preschool programs within centre-based child care services.

A separate budget measure will provide ongoing funding for preschools, initially funded through a new four-year funding agreement with the states and territories. See the article in this Budget Review on ‘Universal access to preschool’.

This brief was amended on 13 May 2021 to correct figures in table 2 and figure 2.