The Costs of Childcare

By Xiaodong Gong

As in many countries, Australian governments subsidize child care heavily. The most cited reason for public subsidy of child care is to encourage women with young children to enter the labour market. Improving child outcomes and distributional considerations related to equitable access to quality child care are two other oft-cited justifications. Currently the Federal Government pays at least half the child care costs of most households through a combination of a means-tested price subsidy (Child Care Benefit, CCB) and a universal subsidy program, originally introduced as a tax rebate for expenditure on child care (Child Care Rebate, CCR) [1]

Nevertheless, public assistance comes with costs, including higher taxes for taxpayers. For example, in the year 2013-14, the Australian Government’s expenditure on child care subsidy was $5.7 billion, or about 1.7 percent of total Australian Government expenditure. It is estimated that the costs could increase to around $7.8 billion by 2016-17 (Productivity Commission, 2014).  Hence it is becoming increasingly pressing to understand the economic effects of child care assistance. Bob Breunig and Xiaodong Gong (2015), by modelling the relationship between child care costs, the demand for child care and mothers’ labour supply, compared the two existing child care subsidies – the means-tested subsidy Child Care Benefit (CCB) and the tax rebate Child Care Tax Rebate (CCTR, the previous form of Child Care Rebate, CCR) in terms of their economic and welfare effects and costs to the government.

Breunig and Gong (2015) find that the tax rebate, CCTR, is more efficient and effective in increasing women’s labor supply. However, child care price subsidies re-distribute the benefits towards those households with less education and less income whereas tax credits disproportionately benefit the already better off. Specifically, they find that:

  • both programs increase the labor supply of mothers, demand for formal care, and the disposable income of the household.
  • For each net dollar spent, CCTR has greater impact on labour supply and household income, both because the impact per dollar spent is greater and because the return in government revenue is higher.
  • In utility/welfare terms (which considers the loss of leisure as well as the gain of higher income and benefits of maternal care), CCB is better or no worse than CCTR for all families with young children.
  • CCB is more redistributive than CCTR.
  • CCTR is less expensive than CCB – on average, for every dollar of child care subsidy, the cost to government was estimated to be 73 cents if it were in CCTR, or 86 cents if it were in CCB (administrative costs were not estimated).

This modelling approach highlights the importance of accounting for the specific features of child care assistance, the tax system and welfare regimes in policy evaluation. The findings illustrate that the choice of forms of assistance, or in general, economic policies, crucially depends on the primary objectives of the government in question. 

References

Breunig, R. and Gong, X. (2015), “Child Care Assistance: Are subsidies or tax credits better?”, Fiscal Studies, forthcoming.

Productivity Commission (2014), Childcare and Early Childhood Learning, Productivity Commission Inquiry Report, Report No 73, Productivity Commission, Commonwealth of Australia, Canberra.


[1] From July next year, the two subsidies will be replaced by a single new ‘simplified’ child care subsidy that combines the feature of the two existing subsidies.