Australia spends roughly 2–2.5% of GDP every year on child-related transfers, a figure comparable to many European welfare states. But unlike much of Europe, where most support is delivered universally, or the United States, where it is provided through tax credits, Australia takes a distinctly targeted approach: relatively generous payments by the Organisation for Economic Co-operation and Development’s (OECD) standards, but with tight means-testing that withdraws benefits as family income rises.
Targeting helps maintain Australia’s fiscal health, but it also has important implications for household behaviour and the wider economy. Our recent research shows that Australia’s approach significantly shapes how Australian mothers work and earn across their lifetimes, revealing a tension between efficiency and equity.
What Australia’s child support system looks like
Two programs dominate Australia’s system of family assistance: the Family Tax Benefit (FTB) and the Child Care Subsidy (CCS). Together, they account for around 70% of total spending on families and each reaches more than one million households.
The FTB provides direct cash income support to eligible families with dependent children, while the CCS subsidises childcare costs, but only when the secondary earner (typically the mother) is engaged in paid work or study. For low-income households with young children, the average payment per program is around AUD 10,000 (2018 dollars), equivalent to roughly 40% of household disposable income. Thus, for parents who qualify, Australia’s child-related transfers can be substantial.
However, both programs phase out as family income rises. The withdrawal of benefits occurs through layered income tests that overlap with a progressive tax system. This interaction creates high effective marginal tax rates (EMTRs) – the share of each extra dollar earned that is lost through higher taxes and lower transfers. For many mothers with a partner in low-income households, EMTRs can exceed 50%, representing a significant disincentive to increase work hours.
In plain terms: for a married mother considering whether to take on extra work hours, the financial reward from doing so can be surprisingly small.
How mothers’ labour supply changes
Using two decades of data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey, we document a striking pattern in maternal labour supply that aligns with the timing of child benefits.
As shown in Figure 1, mothers exhibit an “M-shape” labour supply pattern – a steep drop in full-time participation during the child-rearing years, followed by a slow and incomplete recovery. At the lowest point, mothers work around ten fewer hours per week than comparable women without children. Fathers, by contrast, show no such decline; their labour supply remains largely unchanged relative to men without children.
This divergence in work patterns suggests that the maternal labour supply profile is shaped not only by caregiving demands, but also by the broader set of social norms, workplace structures, and economic incentives embedded in Australia’s transfer system.
This survey-based pattern also matches our findings using administrative tax data (ATO ALife) in Tin, Tran and Zakariyya (2026), which shows a notable and long-lasting mid-career decline in labour earnings for female cohorts entering the labour market between 1991 and 2011.
What would happen if we scrapped means-testing?
Our research focuses specifically on policy incentives, holding constant the myriad other factors that influence work decisions.
To isolate and quantify this effect, we build and calibrate a detailed economic model of Australian households. This allows us to run counterfactual policy experiments to answer a simple but important question: What if we kept the same child benefit levels, but made them universal – i.e., available to all families with children, regardless of income?
The results are striking. Under a fully universal scheme, maternal labour force participation rises by 2.6 percentage points, full-time employment rises by 4.4 points, and average work hours among employed mothers increase by nearly 7%.
By removing the implicit tax on secondary earners’ wages, universality unlocks labour supply and human capital that the current system suppresses. Over a lifetime, these changes compound into higher lifetime earnings and productivity. Long-run welfare rises by 0.85%, equivalent to almost 1% gain in lifetime consumption.
Married households, who make up around 70% of the population, are the largest beneficiaries. Based on economic gains alone, this reform would win majority support.
But there is a catch.
No free lunch: The problem with universality
Providing baseline-level benefits to all families is expensive. Our model estimates that to universalise FTB and CCS, government spending on the two programs would need to increase by 281% and 130%, respectively. To keep the budget balanced, average income tax rates would need to rise by around 4 percentage points.
This tax increase would fall on everyone including single mothers, the group Australia’s child-related transfer system is designed to support. Under the current means‑tested arrangements, most single mothers have family incomes below the relevant thresholds and therefore receive the maximum support. As a result, their work incentives change very little under a universal scheme. What does change is their tax burden: they would face higher income taxes over their life cycle without any additional earnings or benefits, leaving them worse off.
Overall, the higher tax burden, coupled with wage scarring from career interruptions due to parenting, more than offsets the value of universal payments. Our model estimates that single mothers experience a 0.6% decline in welfare under a fully universal system.
In a reform intended to make the system more inclusive, the most vulnerable group ends up worse off.
This result reveals a deeper structural challenge: a universal system that is fiscally costly can inadvertently redistribute resources away from households most dependent on public support, shifting welfare from single-parent to two-parent households.
Is there a better path?
We explore a range of alternatives.
A leaner universal system that pays half the current benefit levels keeps fiscal costs roughly unchanged, improves efficiency, and delivers modest welfare gains for both single mothers and couple households. It comes close to being an inclusive reform. However, some groups, particularly low-education married couples and single men without children, still experience small losses due to the modest increase in tax pressure.
This outcome suggests that, at least in principle, there may exist a point at which universality is both more efficient and equitable than the existing system. But in practice, the complexity of the real-world household behaviours and the political tendency to expand welfare programs make finding and sustaining that optimal point extremely challenging.
A more promising option is an incremental reform within the current system by reducing the phase-out rate of the CCS by half. This extends subsidy eligibility further up the income distribution and lowers the EMTRs faced by secondary earners, without requiring a large increase in public spending. An incremental reform significantly boosts maternal labour supply, especially among the highly productive group of higher‑educated married mothers, and broadens the tax base enough to reduce average tax rates by around 1 percentage point. The resulting welfare gains are modest (about 0.4% for couples and 0.2% for single mothers) but importantly, they are inclusive: all demographic groups benefit, including non‑parents, due to the reduction in taxes.
The political tension
This is where the practical difficulty emerges.
Married couples – the majority of voters – prefer the generous universal option, which offers them greater welfare gains compared with the incremental, fiscally sustainable reform.
Our analysis suggests that once a generous universal child‑benefit system is adopted, it tends to become politically entrenched. Because most voters benefit from it, reversing course toward a more targeted or fiscally conservative approach becomes extremely difficult—even when such alternatives would better support the most vulnerable families.
The bottom line
Effective family policies require balancing equity and efficiency at the same time. Nonetheless, policy debates often focus on who receives benefits, yet how those benefits are financed is just as consequential. Ignoring the tax side risks undermining policy goals and may inadvertently harm the very group these policies aim to support.
In particular, universal child benefits carry this risk. Unless benefit levels are carefully calibrated to avoid large expansions in public spending, universality can leave vulnerable households worse off. By contrast, well‑targeted incremental reforms, most notably reducing the CCS phase‑out rate, offer a pragmatic path forward. Our study finds that these changes improve efficiency, expand work incentives, and generate inclusive welfare gains without requiring major tax increases.
Finally, while our analysis focuses on tax-transfer interactions and maternal labour supply, child‑related transfers shape a much wider set of social outcomes such as maternal health, long‑run productivity, intergenerational mobility, and Australia’s demographic future. Designing effective child‑benefit policy will therefore require integrating insights from these broader research domains.
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