9.6 Paid Parental Leave and child care

Background

As Australia’s population ages, encouraging labour force participation is becoming increasingly important if Australia is to maintain its standard of living. Australia’s female participation rate has been increasing over recent years and is roughly on par with that of the United States (US) and United Kingdom (UK). However, it is less than that in countries such as New Zealand and Canada. Government programmes such as Paid Parental Leave (PPL) and child care fee assistance play an important role in encouraging participation in the workforce.

Paid Parental Leave

Paid Parental Leave is the provision of paid leave for parents upon the birth of a child.

Rationale for government intervention

The Productivity Commission (Productivity Commission, 2009) defined the rationale for a government-paid parental leave (PPL) scheme as: supporting maternal and child health; increasing women’s workforce participation; gender equity; and ‘normalising’ taking time out of the workforce to raise children for both mothers and fathers. Evidence shows that it is beneficial for the health of both the baby and mother for her to have at least around six months off work following the birth of a child. A government-funded scheme ensures that women who do not have access to employer-funded schemes are supported to have time away from work after having a baby.

Attachment to the labour force is a key factor influencing the labour force participation of women after having children and PPL helps women to maintain this attachment. It is anticipated that the provision of a national scheme will increase women’s labour force participation in the long-term.

The provision of a new wage replacement scheme to take effect from 1 July 2015 enshrines PPL as a workforce entitlement, rather than providing a ‘safety net’ as under the current scheme. A benefit of this support being provided by government, rather than employers, is that it will not disadvantage women of child-bearing age in the job market. The provision of superannuation with the scheme also supports the confirmation of PPL as a workforce entitlement.

Current structure of the programme

PPL currently provides a taxable payment set at the minimum wage (currently $622.10 per week) to the primary carer of a newborn or newly adopted child for a maximum period of 18 weeks. The primary carer must have an individual adjusted taxable income of $150,000 or less in the financial year prior to the date of birth/adoption and must meet a work test of at least 330 hours of work (roughly one day a week) in 10 of the past 13 months. Dad and Partner Pay also provides two weeks of leave paid at the minimum wage for partners of a primary carer.

From 1 July 2015, the Government will expand the scheme to provide 26 weeks of pay at the primary carer’s replacement wage, with superannuation. The means test will be removed, but wage replacement will be capped at annual incomes of $150,000. This means that mothers can claim the scheme no matter what their wage income is, but if is above $150,000 they will receive a replacement wage equivalent to $150,000 (i.e. $75,000 over 26 weeks). Fathers and partners will remain eligible for two weeks of pay, but this will be subtracted from the 26 week entitlement. As in the current scheme, mothers or their partner can nominate to be the primary carer, although under the wage replacement scheme the partner will receive wage replacement based on the mother’s wage if it is lower than their own.

Trends and drivers

The expansion of the PPL scheme from 1 July 2015 will increase the costs of the scheme significantly. Although this will be partly funded through the introduction of a 1.5 per cent levy on company taxable income above $5 million per year, the expanded scheme is estimated to cost more than $5 billion per year, in gross terms; and, this is projected to increase into the future, as shown in Chart 9.6.1. Over the 10 years to 2023-24, gross PPL expenditure is projected to increase by 2.9 per cent per year in real terms.

 

Chart 9.6.1: Projected spending on Paid Parental Leave

This chart shows expenditure on Paid Parental Leave growing from under $2 billion in 2013-14 to over $8 billion in 2023-24.

Note: 2013-14 and 2014-15 expenditure relates to the scheme at 2013-14 MYEFO. The remaining years relate to the Government’s new scheme.
Source: National Commission of Audit.

Issues and potential areas for reform

Provision of PPL is important for supporting maternal and child health and increasing women’s workforce participation. However, steps should be taken to better balance the objectives of the scheme with the need to restore government finances and to target government expenditure to those most in need.

The extension of time to 26 weeks and payment of superannuation are consistent with the Productivity Commission (PC) recommendations, to support maternal and child health and address the shortfall in women’s retirement respectively. While the PC did not recommend paying the leave at replacement wages, it is important in establishing the payment as a workforce entitlement, rather than providing a ‘safety net’ as may be perceived under the current scheme. A benefit of government providing this support is that it will not disadvantage women of child bearing age in the job market, as might be the case if employers were required to provide it.

However, wage replacement also reduces the targeting and progressivity of the scheme. Some people who will be entitled to the capped payment of $75,000 will receive almost five times as much as someone on the minimum wage who accesses the scheme.

The Commission considers that the cap on wage replacement should be lowered from $150,000 to reduce the costs of the new scheme when it commences on 1 July 2015. Recognising PPL provides a workplace entitlement, a societal standard should be used to set the cap.

The Commission considers that Average Weekly Earnings, currently $57,460 per year, is a more appropriate cap for the level of wage replacement. This cap would be indexed annually to movements in Average Weekly Earnings.

To offset the scheme’s cost, the Government has committed to introduce, from 1 July 2015, a 1.5 per cent levy on company taxable income above $5 million per year.

The Commission recommends that savings that would arise from the proposed changes to PPL be redirected to fund a proposal to expand eligibility for child care assistance. This proposal is outlined below. It is recommended that, taking into account the introduction of the levy on companies with taxable income greater than $5 million per year, the Commission’s proposals on PPL and child care be implemented so as to be broadly Budget neutral.

Child care

Assistance with child care fees is a key instrument in supporting labour force participation for parents, particularly women.

Rationale for government intervention

Studies have shown that assistance with child care has greater impacts on increasing women’s labour force participation than other sorts of programmes such as paid parental leave (Schwarz, 2012, as cited in Daley et al., 2012). The cost of child care can present a major disincentive for parents to return to the workforce and this particularly impacts on women’s participation, as they are more likely than men to take time out of the workforce to care for children.

Women’s long-term employment prospects are also influenced by the length of time spent out of the labour force. Thus, the key rationale for child care fee assistance is to limit this barrier to labour force participation. Supporting increased labour force participation is increasingly important given the ageing population and associated increase in the number of people outside of the labour force for each person of working age who is likely to pay tax.

Current structure of the programme

Child care assistance is primarily provided though Child Care Benefit (CCB), a means-tested subsidy paid per hour of child care, and Child Care Rebate (CCR), which is not means-tested and refunds 50 per cent of out-of-pocket costs up to a cap of $7,500 per child per year. Depending on their circumstances, parents may be eligible for both payments and claim CCR for their out-of-pocket costs after CCB.

Parents receiving certain income support payments and undertaking approved activities may also be eligible for assistance under the Jobs, Education and Training Child Care Fee Assistance (JETCCFA) programme. Parents are required to make a contribution of $1 per hour for child care after CCB has been taken into account and can then claim CCR on this contribution (bringing the total expense to 50c an hour).

Currently in order to claim CCR, parents need to first apply for CCB, even if they know that their income will be too high for them to be eligible. This is called being eligible for ‘nil-rate CCB’. The form for claiming CCB is 24 pages long. Families receive the maximum rate of CCB if their combined income is below $41,902. The rate is reduced for incomes ranging between this and the cut-out points of $145,642 for one, $150,914 for two or $170,404 for three children in care, plus $32,219 each for fourth and subsequent children.

The calculation of the amount of CCB received by a family is complicated, taking into account a range of factors, including:

  • whether children are at school – rates for school children are 85 per cent of those for children under school-age;
  • type of care – long day care and family day care attract different rates;
  • whether a parent works part-time or full-time – part-time attracts a loading; and
  • number of children in care – rates are paid per child, but an additional loading is included based on the total number of children in a type of care.

Parents are able to access CCB to cover up to 24 hours of care per week before an activity test applies. To claim CCB for more than 24 hours of care, parents must demonstrate that they work or study for at least 15 hours per week. To claim CCR parents must indicate that they participated in work-related commitments at some time during the week, for example paid work or self employment, training, study or job search. No minimum number of hours is required.

Current fee assistance is only available to families using ‘approved care’ – predominantly either long day care (care provided in a centre) or family day care (provided by a certified provider in their home). Relatives, friends and other carers who currently care for children while their parents are at work are able to register with the Department of Human Services. This enables parents to receive a minimal rate of CCB in respect of this ‘registered care’ (a maximum of $33.30 per week) if they are eligible for the means-tested payment, but not CCR, meaning that many parents are not eligible for any support in respect of this type of care.

The Commonwealth also subsidises a capped number of places for in-home care (where an approved carer works in the child’s home) for families in special circumstances where they cannot access other approved care, for example where the child or parent has an illness or disability, the family lives in a remote area or other care is not available to cover parents’ working hours.

Trends and drivers

Due to increasing child care usage and fees, expenditure on child care fee assistance has increased significantly and is projected to continue to do so. In March 2013, more than one million children under 12 years of age used approved care (Productivity Commission, 2014). In 2013-14, government expenditure on child care is expected to be almost $5.5 billion. Beyond the forward estimates, child care expenditure is projected to grow by 5.8 per cent per year in real terms, bringing projected total nominal expenditure to $9.9 billion in 2023-24, as shown in Chart 9.6.2.

 

Chart 9.6.2: Projected spending on child care fee assistance

This chart shows Child Care fee assistance growing from around $5 billion in 2013-14 to over $12 billion in 2023-24.

Source: National Commission of Audit.

 

Issues and potential areas for reform

The Commission considers that there is a rationale to retain a level of child care fee assistance for all families regardless of income, due to the significant benefits from increased participation in terms of overall employment and economic growth. However, the current dual-payment system is unnecessarily complex and could be better designed to keep pace with varying and growing child care fees.

A single, means-tested payment structure, similar to that proposed in Australia’s Future Tax System (Australian Government, 2010) would streamline the administration of child care assistance, ensure that payments are better targeted to those in need of assistance and make entitlements clearer to parents.

The current level of complexity, particularly of CCB is unnecessary and means that recipients are unlikely to have a clear understanding of their entitlement or the impact of changing their workforce participation could have on their entitlement. Further, there does not seem to be a strong rationale for the various CCB loadings to justify this complexity. The Henry Tax Review did not recommend that any of the additional loadings applied in CCB remain in the new single payment that was recommended to replace CCB and CCR. In addition to this, support based on a proportion of child care fees is able to better keep pace with growth, geographic and other variations in pricing than an hourly subsidy such as CCB.

The new payment could be designed to broadly maintain current levels of assistance, in total reimbursing around 80 per cent of fees for low income families, with a base of assistance of 50 per cent available to all families. This would be broadly Budget neutral.

The JETCCFA programme already ensures that the most disadvantaged parents are able to access very highly subsidised child care. JETCCFA, in conjunction with CCR, ensures that parents receiving certain income support payments can access child care for around 50 cents an hour – representing a subsidy that is generally greater than 90 per cent.

Currently parents are able to claim CCB for up to 24 hours of child care per week, after which they must meet a ‘work, training, study test’, indicating that they work or undertake educational activities for at least 15 hours per week. CCR requires parents to indicate that they spend some time on work or work‑related activities each week, without a specified time requirement. The Commission considers it reasonable that child care should only be subsidised by government when it is used to enable parents to work, train or study. It is recommended that in order to claim the new payment to cover any amount of child care, parents should satisfy a work, training, study test, broadly in line with the amount of child care claimed.

As described above, current fee assistance is only available to families using ‘approved care’, with only minimal CCB being available for registered care. This highly regulated system limits parents’ choices in the type of care that is most appropriate for them, which can then affect their ability to participate in the workforce. It is well known that many families have trouble accessing approved child care, including with long waiting lists, placing siblings with the same provider, finding care convenient to home or work and to cover work outside of ‘usual’ business hours (Productivity Commission, 2013; Department of Education, 2013). This puts pressure on many families to rely on grandparents, other relatives or friends to care for their children while they are at work, or to limit their participation in work.

In particular there is currently a lack of approved care available outside of standard business hours, while the modern workplace is increasingly requiring people to work outside of these hours. Almost all providers of approved care (98 per cent) offer care five days a week, the majority of which do not vary these hours. Just over a third of long day care providers offer care outside the hours of 7am to 6:30pm Monday to Friday (Department of Education, Employment, 2013). This lack of flexible care means that it is very difficult for people in occupations that require shift or on‑call work, casual or irregular hours, for example nursing, policing, retail and hospitality, to find care appropriate to their needs. Many such occupations are also those with lower pay. Therefore it is particularly important that affordable care is available for parents with irregular hours, as, if their incomes are low, their participation is likely to be more sensitive to child care costs.

This issue has been acknowledged by government, although efforts to address it have been piecemeal and fragmented, for example eligible parents being able to claim a minimal rate of CCB, but not CCR, in respect of registered care, and a small number of in-home care places being subsidised for parents with special circumstances. The Government is also currently running Flexibility Trials, which support a range of approved care providers to trial more flexible care hours over a three year period. This acknowledges that there is a lack of flexible care, but does not go far to addressing the issue.

 

Table 9.6.1 Types of child care and early learning

Types of care currently subsidised by Child Care Bonus and Child Care Rebate

Types of care not currently subsidised or only partially subsidised

Long Day Care (LDC)

Registered Care

Centre-based services providing all-day or part-time care. Long day care primarily provides services for children aged 0–5 years. Some long day care may also provide preschool and kindergarten programs and outside school hours care.

Care provided by relatives, friends or carers who are registered with the Department of Human Services. CCB, but not CCR, can be claimed in respect of this care.

Family Day Care (FDC)

In-home Care

Care provided by a registered carer in their own home for a small group of children. Care is primarily aimed at children aged 0–5 years, but primary school children may also receive care before and after school, and during school holidays. FDC programmes are generally centrally managed through an organisation.

Care provided in the child's home by an accredited carer. Currently the Government subsidises in-home care for a relatively small number of capped places for families in special circumstances, for example where the parent or child has a disability or illness or live in a remote area.

Occasional Care

Services usually provided at a centre on an hourly or sessional basis for short periods or at irregular intervals. These services are aimed primarily at children aged 0–5 years.

 

Preschool

 

Preschool is a structured, play-based learning programme, delivered by a degree qualified teacher, aimed at children in the year before they commence full-time schooling. Programmes can be delivered in a variety of service settings, including stand-alone preschools or kindergartens, LDC centres, or in association with a school, religious or cultural group.

 

Outside School Hours Care

 

Services providing care for school aged children before and after school, during school holidays and pupil free days. Outside school hours care may use stand-alone facilities, or share school buildings and grounds.

 

Source: Adapted from Productivity Commission, 2013.

 

Table 9.6.1 above shows the main types of child care that are currently available. The key distinction with regard to eligibility for fee assistance is between ‘approved’ and ‘registered’ care. Approved care services are the most commonly used and are approved by the government as meeting certain quality standards and operating requirements. Registered care also has to meet certain regulations and standards but includes the care provided by grandparents and other carers who are registered with the Department of Human Services. Registered care is more likely to cover flexible hours and be provided in the parents’ home, making it more convenient for many families.

Currently in-home care is only subsidised for a capped number of families in particular circumstances. In many cases for families with two or more children it may be more affordable than long day care.

The child care system should support rather than restrict parents’ choice. Opening up the market to more flexible and tailored care options may also ease the pressure on approved care services, reducing waiting lists and other complexities faced by parents seeking to use child care. The Commission considers that the new single payment be extended to cover types of care that are not currently subsidised, including for example the care provided by grandparents and in-home care for all families that choose to use it. As an integrity measure, the Commission recommends that parents be required to provide the name and tax file number of their children’s carer and the hourly fee they are paid.

There have been longstanding concerns about the level of regulation in the child care sector, particularly from smaller providers (Productivity Commission, 2013). Some areas of overlap are currently being addressed through the National Quality Framework, however the Framework is also introducing further regulation, such as staff-to-child ratios and qualification requirements, which will be challenging for some providers to meet. As well as the regulation of approved care, the Productivity Commission is also examining the regulation of types of child care that are not currently subsidised, and will be reporting on what regulation, if any, should be required. This could inform the design of expanded child care assistance arrangements

In order to ensure support is well targeted, it is recommended that caps apply to the total amount of rebate received per child per year and the number of hours of care that can be claimed (such as 100 hours per fortnight).

Currently an annual per-child cap of $7,500 applies to CCR. However, with the new payment structure based purely on a percentage of fees being reimbursed, lower income families who receive a greater proportion of their fees back would meet the annual cap faster than higher income families. A proportionately higher cap could be applied to low income families receiving the maximum rate of assistance, for example $12,000 per child per year, tapering to the current cap of $7,500 per year for families receiving the 50 per cent rebate.

Recognising that access to child care is fundamental for many women who are seeking to enter or re-enter the workforce, the Commission proposes that savings that arise from the Commission’s recommendations on Paid Parental Leave be redirected to fund this proposal to expand eligibility for child care assistance. It is recommended that the implementation settings (including the caps and the means test and expansion of eligible types of care) of the new child care payment be designed in order to broadly maintain Budget neutrality, taking into account the revenue from the 1.5 per cent levy on company taxable income above $5 million per year.

References

Australian Government 2010, Australia’s Future Tax System Review, (Henry Tax Review), Australian Government, Canberra.

Daley, J, McGannon, C and Ginnivan, L 2012, Game-changers: Economic Reform Priorities for Australia, Grattan Institute, Melbourne.

Department of Education, Employment and Workplace Relations 2013, Child Care in Australia, viewed December 2013, <http://www.mychild.gov.au/documents/docs/Child_Care_In_Australia.pdf>.

Productivity Commission 2009, Paid Parental Leave: Support for Parents with Newborn Children, Report no. 47, Canberra.

Productivity Commission 2013, Child Care and Early Childhood Learning, Issues Paper, Canberra.

Productivity Commission 2014, Report on Government Services 2014, Child Care, Education and Training, Steering Committee for the Review of Government Service Provision, Canberra.

Schwarz, P 2012, Tax Disincentives and Female Employment in OECD Countries, Journal of European Social Policy, 22(17).