31-03-2025
Cheaper Australian childcare failing to help lower-income mothers return to work
Throwing more money at cheaper childcare fees won't be enough to help mothers with young children get back to work, new research shows, as lower-income families lose more in benefits and taxes than they gain from working an extra day.
The independent economic research body e61 Institute analysed childcare reforms in 2018 and found that higher subsidies for lower- and middle-income families had no measurable impact on mothers' participation in the jobs market.
Women's earnings plunge by 55% on average in the first five years of parenthood, and this 'motherhood penalty' mostly persists for a decade after giving birth, previous Treasury analysis has found.
Australian women with dependent children are less likely to be employed full-time than in comparable countries such as New Zealand, the US, the UK and Canada.
But Silvia Griselda, a research manager at e61 and co-author of the report, said the findings were a warning for policymakers that 'increasing childcare subsidies can be costly and ineffective if not carefully designed'.
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Griselda said cheaper childcare did lead to more children attending centres – an important goal in itself – but that for some low-income families, an increase in childcare subsidies was not enough to offset the loss of benefits and higher taxes from moving, for example, from two to three days of work a week.
Cheaper childcare did, however, have more of an impact on labor force participation of parents in middle- to high-income families.
'If we are to truly unlock the economic benefits of childcare investment we need a comprehensive approach that considers not only the cost of childcare, but the entire tax and transfer system,' Griselda said.
Lower-income families are eligible for benefits and tax offsets such as the parenting payment, family tax benefits A and B and the low-income tax offset.
The Treasury secretary, Steven Kennedy, has also highlighted the need to tackle these high so-called 'workforce disincentive rates', which measure the share of an additional day's pay lost to taxes, reductions in benefits and childcare costs.
Anthony Albanese has committed to delivering universal childcare, although in what form remains an open question.
Since coming to power Labor has committed $3.6bn over two years to deliver a 15% boost to childcare workers' pay, and lifted the subsidy rate to 90% for families earning less than $80,000.
The government also legislated to remove the activity test – which determines parents' level of subsidies based on the number of hours they work in a fortnight – for three days of care from 2026, and has promised to establish a $1bn fund to build and expand childcare centres in areas where parents struggle to find places.
Despite the additional billions spent, parents still complain of high and rising costs of putting children in early education and care, particularly as centres increase prices by more than the additional subsidies.
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Out-of-pocket childcare expenses have climbed by nearly 10% in the past year, even as inflation more broadly has slowed to under 3%. The Australian Competition and Consumer Commission (ACCC) early last year found that higher subsidies were only having a 'limited' effect on parents' costs.
Over the longer term, the picture is better: childcare costs are 3.4% lower than two years ago, and 5.3% down since December 2021, according to the latest Australian Bureau of Statistics figures.
There is growing support for expanding the number of not-for-profit childcare centres, as the spotlight on the expanding for-profit sector intensifies amid recent reports of abuse and ongoing concerns about wider safety.
The government has reportedly flirted with the idea of a $10-a-day price cap on fees – a model strongly backed by advocacy groups such as the Parenthood.
But the new findings from e61 back up Productivity Commission modelling last year that showed even substantially more generous childcare subsidy rates (at an additional $5bn cost to the budget) would have a 'negligible' effect on parents' labour force participation.
Nonetheless, the PC recommended an approach that would deliver access to at least three days a week of quality early childhood education and care, and that this would require a major multi-year effort to expand the supply of centres, particularly in regional and remote areas.
Under its preferred option, care would be 'effectively free' for families earning under $80,000 – which includes around a third of families with small children.
The PC and early childhood experts said that beyond the narrow focus on workforce participation, boosting attendance in formal early childhood education was particularly beneficial for children in poorer households who were least likely to attend.
