The Benefits of Simplifying the Child Care Subsidy System

Xiaodong Gong

Principle Research Fellow and Associate Professor, NATSEM

The current child care subsidy system (which consists of means-tested Child Care Benefits (CCB) and the non means-tested Child Care Rebate (CCR)), coupled with the taxation and welfare system, is notoriously so complicated that it is hard for Australians to figure out the exact child care costs they face without using a tricky mathematical formula. For example, eligibility for and the rate of CCB one may get depends upon employment status, family income, hours of child care used, and the age of the child.

It is understood that one of the aims of the current child care reform is to simplify this complicated system. The major changes proposed include combining CCB and CCR into one means-tested child care payment, removing the $7,500 annual cap on child care payments and removing an activity test for child care usage below 12 hours per week. It is evident that a simpler and more transparent system may both serve the policy objective better and save taxpayers’ money. There are two main arguments in support of this claim.

Firstly, simplifying the child care system should strengthen the main purpose of the child care subsidy—encouraging the labour supply of parents. It is well known that the main purpose of subsiding child care by governments around the world is to encourage women to participate in the labour market by reducing the costs of working or equivalently increasing the net wage. The key assumption here is that individuals, when making employment decisions understand perfectly how many more dollars of child care subsidy can be gained for one extra hour of work. However, with such a complicated system, it is questionable how many individuals are able to tell the difference in the net pay they receive with and without child care subsidy.

In these circumstances, the effect of such subsidy on labour supply would at best be discounted. Making the system simpler and more transparent will help individuals understand better the payoffs of different alternatives they could choose from so that they could make an informed decision. Given that wage elasticity is positive, child care subsidy would thus increase labour supply, an observation confirmed by many studies.

Secondly, simplifying the system would lower the administrative costs related to the provision of child care subsidies. As for any governmental services, administrating child care subsidies involve costs. For example, in the 2014-15 financial year, the costs of social security and welfare by the Commonwealth Government were about $149.1billion (see: Australian Government, ‘Statement 5: expenses and net capital investment’, Budget strategy and outlook: budget paper no. 1; 2015–16, p. 5-27), with the budgeted administrative costs of the Department of Human Services alone at about $3.8billion (see: Department of Human Services 2014-15 Annual Report), which is about 3% of the total costs of social security and welfare. The more complex a social security program, the higher the costs.

Hence the simplification of the child care subsidy system is a move in the right direction, but more can still be done to simplify the overall social security and welfare system, lessen administrative costs and make is easier for Australians to join the labour market. 

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