Child Care Reform - How does it affect Australian families?
Starting in July 2018, the new Child Care Subsidy will replace the current Child Care Benefit (CCB) and Child Care Rebate (CCR).
Summary of Reform
Starting in July 2018, the new Child Care Subsidy will replace the current Child Care Benefit (CCB) and Child Care Rebate (CCR). The current payment system is a combination of a means tested CCB, and a non-means tested but capped CCR (covers 50% of fees up to an annual cap of $7,500). Low-income families and families on income support obtain the maximum benefit, yet for families on higher earnings, the payment tapers. Few families with income above $180,000 per annum receive child care benefit for formal child care costs although they may still be eligible to receive childcare rebate. The new scheme will be implemented with a single means- and activity- tested subsidy. Payment will cover 85% of fees for families on $65,710 or less but tapers down to 50% of charges for families on $170,710-$250,000 and further down to 20% for families on $250,000-$340,000. Families earning more than $350,000 receive no subsidy. Fee support caps are based upon an hourly rate ($11.55 centre-based day care, $10.70 family day care, $10.10 outside school hours care) and another $10,000 annual cap on subsidies is applied to families earning more than $185,710.
The existing policy provides for up to 24 hours of CCB payment per week notwithstanding number of hours worked by a couple or a single parent, and 50 hours CCB subsidy for at least 15 hours working, training or studying. Under the new policy, a new activity test ensures that parents will only receive a subsidy where both parents undertake an approved activity for at least eight hours per fortnight each. The subsidised hours per fortnight per child of care are up to 36 hours if they work for more than 16 hours per fortnight and increase to 100 hours when they work greater than 48 hours. For families with incomes of around $65,000 or less, who fail to meet the activity test requirements, they will be qualified to receive up to 24 hours of support for each child per fortnight.
This new child care subsidy, although sometimes advertised as the "simplified" childcare support policy, is quite complex and will affect different households with varying impacts. This article estimates the monetary implications of this child care reform for some of the most common household types in Australia.
Method of Analysis
We compare the new childcare subsidy scheme with the current policy using STINMOD+, a tax and transfer microsimulation model developed by NATSEM at the University of Canberra. For consistency purposes, we use financial year 2018 as the benchmark year. We update all existing benefit rates and income limits in line with CPI adjustments as a forecast for 2018-19. Under this projection, the rate of CCB is expected to provide up to $4.75, $4.96 and $5.16 per hour for families with one, two or more than two non-school-aged children respectively. 85 percent of those rates are applied to school-aged children while more than 100% of those rates are for part-time care depending on the hours of care.
Key modelling assumptions are listed below.
- Earnings: The minimum wage and the average weekly earning data are obtained from Fair Work Australia and the ABS respectively. The 2018 values are projected using an average of growth rates of the most recent five years (2.68% for minimum wage and 3.05% for an average wage). High-income workers are assumed to receive twice the average wage level. Three types of earnings are assumed to be at $18.7/hour, $42.4/hour and $84.8/hour.
- Care fees and hours: Care Fees and hours vary substantially across different care centres and states. On average, we project the long day care rate of approximately $11/hour (based on the rate of $7.20/hour in 2012 and an average annual growth rate of 7%: https://www.mychild.gov.au/sites/mychild/files/documents/04-2015/child_care_in_australia.pdf). We assume the outside school care rate for school-aged children is 85% of this rate ($9.35/hour). We assume a year of childcare for a non-school aged child costs $27,500, assuming 48 hours of long day care per week, and the annual cost for a school-aged child is $11,700, which covers both out-of-school and vocational care throughout the year, averaging at 24 hours a week.
- Three typical households include single parents with a non-school aged child (3 years old), single parents with a school aged child (8 years old), and couples with both non-school and school aged children (3 and 8 years old). Couples with only one type of child (either school aged or non-school aged) are not explicitly included in the analysis, but their results are comparable to the single parent households albeit at a higher household income level. All these family types account for more than 50% of Australian households (based on the 2013-14 Survey of Income and Housing). Three labour force statuses, full-time, part-time and unemployed, are included in the analysis. We exclude Jobs, Education and Training Child Care Fee Assistance (JET) in the analysis as it has only a limited payment duration and will be replaced by the child care subsidy.
General Cases - Average Typical Households
Full-time working, single parent with non-school aged child
Full-time working, single parents with non-school-aged children will become better off regardless of their income level below $320,000 where the child care subsidy under the new scheme reaches the CCR cap (See Figure 1). However, those in the middle-income group benefit the most from the new policy: an increase of up to 23% of fees subsidised for families earning around $168,000 per year, compared with a 14.5% increase for those on the low income. This is largely due to the taper design of the CCB, where the benefit starts to drop before the family has an income of $50,000. Additionally, the lower income single parent households may be exempted from the income test as they could receive Centrelink payment such as Parenting Payment Single. The taper threshold for the new child care subsidy is set a higher value of $65,710.
Full-time working, single parent with a school aged child
Similarly, under the new scheme, single parents working full-time receive a higher child care subsidy if their income is below $170,710. Beyond this income threshold, 50% of the fee is covered, equal to the CCR rate without any CCB based on the existing policy (See Figure 2). Again, a more generous subsidy increase goes to families earning average income: an increase of up to 27% of fee subsidised for families on around $90,000 per year, compared with a climb by 13.5% for those on the low income.
Full-time working couples with non-school and school aged children
The new child care subsidy scheme affects full-time working couples differently at different income levels. Couples with a joint income below $170,710 become much better off. Those who earn between $170,710 and $250,000 are less affected because 50% of fees subsidised under the new policy is closer to 33% which they get under the current scheme ($7,500 for the first child and 50% rebate for the second child). Couples at the higher rate of earnings will be worse off once their joint income reaches $300,000.
Variation in Parameters
In this part, we examine how variations in working hours, hours of care and child care prices can affect the child care subsidy. We only report the analytical results for the first typical type of household (single parents with non-school-aged child) as similar patterns can be observed in other family types.
Controlling for same care hours (28 hours/week) and similar care fees ($11/hour), a single parent working more than 8 hours/week will receive a higher benefit from the new scheme regardless of their wage income (see Figure 4). The difference comes from the activity test. Following the current policy, only 24 hours of care are subsidised if parents work less than 15 hours/week. Meanwhile, all 28 hours of care are supported if parents work more than 8 hours/week under the new scheme.
Figure 4: Child care subsidies at different working hours
Holding the care rate constant ($11/hour), a combination of job status and the number of care hours will affect the benefit that a household can receive. Unemployed parents face a subsidy reduction if enrolling their children for more than 12 hours/week in long day care (see Figure 5a). This threshold is set up for low-income earners who fail to meet the activity test under the new scheme. Under the current policy, this type of household can enjoy at least 24 hours per week of CCB subsidy plus CCR without any activity test.
Figure 5a: Subsidies at different hours of child care usage (single parents, unemployed)
When entering the labour force, higher subsidy goes to part-time workers if sending their children to a childcare centre for less than 44 hours/week (Figure 5b). There is no payment gain for full-time workers with kids who spend up to 50 hours/week in care (Figure 5c).
Figure 5b: Subsidies at different hours of child care usage (single parents with part-time job)
Figure 5c: Subsidies at different hours of child care usage (single parents with full-time job)
Hourly rate of childcare
Keeping the care hours at 28 hours per week, single parents working part-time and earning low or average wages will be worse off under the new scheme if care rates deviate much from the assumed average hourly rate. The impact to high wage earners however, is limited. (Figure 6).
Figure 6: Subsidies at different rates of child care (single parents with part-time job)
The child care subsidy reform commencing in July 2018 will replace the current scheme of child care benefit and child care rebate. Our modeling reveals that full-time working parents become better off regardless of their income level under $320,000 for single parents with non-school aged child, $180,000 for single parents with school-aged child and $310,000 for couple of parents. There is a consistent trend that those in the middle-income group are expected to gain most from the new scheme. Unemployed parents, in contrast, will face a subsidy reduction if their children were enrolled for more than 12 hours per week in long-day care. In some cases where the child care price deviate much from the national average, part-time working parents with low or average wages, who are sending their kids into part-time care, could become worse off under the new scheme.