Productivity Commission’s Child Care Report: An Alternative Perspective

The Productivity Commission’s report, A Path to Universal Early Childhood Education and Care, presents detailed information and a range of studies supporting universal early childhood education and care (ECEC). However, there are significant issues with its analytical framework and recommendations, particularly regarding increased childcare subsidies.

Issues with the Commission’s approach

While some limitations arise from the government’s terms of reference, the Commission’s economic analysis falls short in several areas:

1. Dual objectives of ECEC: The Commission does not fully explore the dual objectives of ECEC as both a critical part of the education system and a means to boost workforce participation. These goals might require separate policy tools. For example, following the Tinbergen rule in economics would mean addressing each objective independently to determine distinct policy responses.

2. Overemphasis on workforce participation: The report assumes that higher workforce participation is inherently beneficial but overlooks that this choice varies by individual. Many people opt to reduce paid work to prioritise family time or unpaid work, which often includes childcare and community roles. Economists and feminists alike have long recognised that GDP does not account for unpaid work. Instead of pushing participation, policy could focus on enabling parental choice and supporting parents’ diverse career pathways, recognising unpaid contributions. Yet, this dimension is only lightly discussed in the report.

3. Limited exploration of existing policy tools: The report does not deeply analyse related policies such as paid parental leave, parenting payments, and Family Tax Benefits. While these are mentioned in the report’s Volume 2, it lacks a robust analysis of how modifying these existing supports could achieve better outcomes.

4. Underestimating costs: The report’s recommendations seem overly optimistic regarding costs, omitting a thorough examination of the potential financial impact on public funds.

Early childhood education

The Commission discusses the benefits of early education for preschoolers, especially children aged four, with some benefits for younger children. However, the report does not clarify the optimal hours or structure of education for various age groups. Currently, many preschools offer around 15 hours for four-year-olds, and fewer hours may be appropriate for younger children. Yet, the Commission recommends expanded access to high-quality care without specifying these distinctions.

Defining “quality” in early childhood education is complex, as it involves both educational and general care aspects. For example, the National Quality Standards (NQS) cover educational elements such as staffing and child-to-educator ratios, while other standards relate to safety and governance. A breakdown of these elements could have helped the Commission target funding more effectively to ensure high-quality education for disadvantaged children, rather than merely proposing increased subsidies.

Distinguishing education from general care

The Commission does not clearly distinguish between education and general care in its recommendation for higher subsidies. It might have considered different approaches to achieving universal, high-quality early education, such as:

• State-employed educators: Governments could employ educators in preschools and childcare centres to deliver age-appropriate, evidence-based education.
• Targeted subsidies for qualified staff: A universal subsidy could support the employment of qualified educators in childcare centres, adjusted by the age group of children.

Rethinking childcare policy for young children

A more targeted approach to childcare policy might focus on the care needs of different age groups. For example:

• Babies require full-time, individualised care.
• Toddlers generally need one-on-one care.
• Preschoolers (ages two to five) can often be managed in small groups for part of the day.

The report focuses mainly on childcare subsidies, overlooking the detailed age-based needs of children. Commonwealth policies supporting two-parent families with children currently include:

1. Babies: Paid parental leave offers a minimum wage for approximately five months.
2. Children under Two: No specific age-targeted support, assistance being the same as for preschoolers, though childcare cross subsidies tend to cover toddlers’ higher staff-to-child ratios.
3. Preschoolers: Family Tax Benefits and childcare subsidies offer support, but the assistance varies widely based on the form of care parents choose and their family income.

The Commission’s proposal to increase childcare fee relief might be politically attractive, but an ideal system might streamline all childcare support, allowing families more options for managing care costs and working choices. Payments could be based on the child’s age and adjusted as children grow, with higher support for babies, gradually reduced for older children. This would reduce complexity and target subsidies to each age group’s actual needs.

Workforce participation and incentives

The report recognises women’s rising workforce participation over recent decades, though participation among mothers still tends to dip sharply with childbirth and rise as children approach school age. The report highlights that means-testing in current support systems, combined with the structure of personal income tax, can create high effective marginal tax rates (EMTRs) for parents of young children. Though childcare subsidies contribute to this effect, broader interactions with Family Tax Benefits and income tax create even higher EMTRs.

Rather than further relaxing means testing, a more effective approach might involve reinstating a more universal family allowance and indexing it to wages, as recommended by the Henry Review.

An age-based payment structure would assist parents with their childcare costs, whether directly or through forgone income when choosing to care for their own children. It would however add to workforce disincentives as families choosing more paid work would face childcare fees. That may suggest retaining some fee relief, but not increasing it as the Commission recommends.

Reducing long-term career penalties

A substantial issue in workforce participation is the career cost of taking time off for parenting, which contributes to gender disparities in career progression. The Commission could have examined this issue more deeply, suggesting policies that mitigate the career impacts of reduced workforce participation.

Regulating childcare quality

A shift to cash subsidies and family choice does not preclude the need for regulated childcare standards. Professor Deborah Brennan, the Commission Chair, suggests that a system relying more on not-for-profit or government-managed centres could improve outcomes over a for-profit model. State and Territory education departments overseeing training in childcare centres could be a first step in raising service quality.

Conclusion

A more robust analysis by the Commission might have yielded different priorities or recommendations. Addressing early childhood education separately from childcare could ensure free, high-quality education for preschoolers while simplifying support for young children’s care. If moving to a simpler system proves challenging, certain immediate steps could still enhance family choices and fairness in childcare policy, such as:

• Supporting families with reduced work hours: Offering more aid to parents of very young children who choose part-time or reduced work hours.
• Making family allowance more accessible: Expanding the basic Family Tax Benefit Part A and adjusting it to wage levels.
• Addressing long-term career costs: Developing policies to reduce career penalties for parents, particularly mothers, who reduce workforce participation.

Given these priorities, budget considerations would seem to rule against the Commission’s recommendation of completely free childcare.

 

This article is also published as TTPI Policy Brief 5/2024, “Productivity Commission’s child care report: An alternative perspective”.