7.6 Paid Parental Leave and child care

Australia has a significant opportunity to improve the labour force participation rates of women and should do so as a way of lifting growth. Government programmes such as Paid Parental Leave and child care fee assistance play an important role in reducing barriers that discourage women from participating in the workforce.

A government-funded universal Paid Parental Leave scheme was first introduced in 2011. It provides assistance equivalent to the minimum wage (currently $622.10 per week) to the primary carer of a newborn child for a maximum of 18 weeks. The payment is means tested and a work test also applies. ‘Dad and Partner Pay’ also provides two weeks of leave paid at the minimum wage for partners of a primary carer.

The Productivity Commission notes it is beneficial for the health of both the baby and mother for the mother to have at least six months off work following birth. A government funded maternity leave scheme ensures access for people who are not covered by employer-funded schemes and avoids employers being discouraged from hiring women of child-bearing age. It is also anticipated that the provision of a national Paid Parental Leave scheme will increase women’s labour force participation in the long-term.

The Government will expand the existing scheme from 2015 to provide 26 weeks of pay at the primary carer’s replacement wage including superannuation. The existing means test on the payment will be removed, but wage replacement will be capped at incomes of $150,000.

The increase to 26 weeks of leave and introduction of superannuation payments in 2015 are consistent with Productivity Commission recommendations. The Government is also expanding the scheme to be based on ‘wage replacement’ (rather than the minimum wage) to recognise Paid Parental Leave as a workplace entitlement.

This change significantly increases the scheme’s costs, which are now expected to be over $5 billion per year in gross terms. Wage replacement also reduces the targeting and progressivity of the scheme.

The Commission recognises Paid Parental Leave has the potential to support maternal and child health and increase 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 expenditure to those most in need.

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 Paid Parental Leave 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.

In seeking to improve the workforce participation of women the Commission acknowledges that the cost and availability of child care can be as important as paid parental leave. Accordingly, the savings from the lower cap should be redirected to fund a proposal to expand eligibility for child care assistance.

That is, the 1.5 per cent levy on company taxable income above $5 million per year should be retained so that the modified paid parental leave scheme could co-exist with an expanded child care proposal to be implemented in a broadly budget neutral way.

This proposal to expand eligibility for child care assistance is outlined below.

Recommendation 21: Paid Parental Leave

Paid Parental Leave has the potential to support maternal and child health and increase women's workforce participation. The Commission recommends:

  1. targeting expenditure to those most in need by lowering the Paid Parental Leave wage replacement cap to Average Weekly Earnings (currently $57,460), indexed annually to movements in this wage; and
  2. savings from the lower wage replacement cap be redirected to offset the cost of expanded child care assistance, with the intent of making the changes broadly budget neutral, including retaining the 1.5 per cent levy on company taxable income above $5 million per year.

Child care

The cost of child care has particular impacts on the workforce participation rates of women, who are more likely than men to take time out of the workforce to care for children. The long-term employment prospects of women are also influenced by the length of time spent out of the labour force.

The Productivity Commission is currently undertaking a major review of child care and early childhood learning, with their final report due in October 2014. This inquiry is comprehensive and will cover child care fee assistance and regulation of the sector. The Commission welcomes this review and has made several recommendations that could inform the Productivity Commission’s work.

Australia currently has a dual assistance system, where the Child Care Benefit provides a means-tested subsidy per hour of care, while the Child Care Rebate covers 50 per cent of out-of-pocket costs for all parents up to an annual per-child cap (Chart 7.10). These arrangements are unnecessarily complex.

Support based on a simple reimbursement of a proportion of child care fees would better keep pace with growth in child care costs, simplify administration and make entitlements clearer to those accessing benefits. Further details on the types of subsidised child care are outlined in Section 9.6 of the Appendix to this Report.

Chart 7.10: Percentage of child care fees covered by Child Care Rebate and Child Care Benefit, by family income

This chart shows the proportion of out-of-pocket costs covered by Child Care Benefit and Child Care Rebate by family income ranging from zero to $140,000. It assumes that 50 hours of care are used each week at a cost of $7 per hour. Families with incomes below $42,000 receive just below 80 per cent of their out-of-pocket costs through CCR and CCB, after which CCB begins to be withdrawn. For families with income of $140,000 around 44 per cent of out-of-pocket costs are refunded, as they receive only a minimal amount of CCB and have reached the annual cap of $7,500 for CCR, given the assumptions about child care use and costs.

Source: National Commission of Audit.
Note: assumed one child in care for 50 hours per week based at $7.00 per hour.

The Commission recommends replacing the Child Care Rebate and Child Care Benefit with a single, means-tested payment that reimburses parents for a proportion of child care costs. The new payment should be broadly budget neutral and roughly maintain current levels of assistance of around 80 per cent for low income families, with a base of assistance of 50 per cent available to all families.

Currently parents are able to claim the Child Care Benefit for up to 24 hours of child care per week, after which they must meet a ‘work, training, study test’ demonstrating that they work at least 15 hours per week. Child Care Rebate involves an informal indication that parents spend some time on work or work-related activities each week.

The Commission considers it reasonable that child care should only be subsidised by the 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.

Currently, 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).

Many families have trouble accessing approved child care that meets their needs. There are often long waiting lists and difficulties associated with trying to place siblings with the same provider. It is particularly hard to access child care outside of ‘usual’ business hours.

As well as limiting parents’ choice, these restrictions have a negative impact on workforce participation. For example, mothers may delay their return to work or work fewer hours because adequate, affordable child care is simply not available.

Lack of flexible care adversely affects people in occupations that require shift or on-call work, such as nursing, policing, retail and hospitality. Many rely on family or friends who care for their children while they are at work.

This issue has been acknowledged by government, although efforts to address it have been piecemeal and fragmented. For example, only a minimal rate of Child Care Benefit (up to $33.30 per week) can be claimed in respect of ‘registered care’ provided by relatives, friends or other carers who are registered with the Department of Human Services. However, Child Care Rebate cannot be claimed for registered care, meaning that many parents are not eligible for any support in respect of this type of care.

Similarly, the government subsidises a capped number of places for in-home care where an approved carer comes to the child’s home for families in special circumstances (for example where the parent has a disability, the family lives in a remote area or care is not available during the parents’ working hours).

The Commission believes that child care fee assistance should support, rather than limit, parents’ choice about the type of care they use for their children. The Commission recommends that eligibility for the new child care payment be broadened to include other types of care that are currently not subsidised, for example care by grandparents and paid in-home carers. 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 that they are paid.

There have been longstanding concerns about the level of regulation in the child care sector, particularly from smaller providers. 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 and add significantly to costs.

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 Child Care Rebate. 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 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) of the new child care payment be designed in order to broadly maintain budget neutrality, taking into account the 1.5 per cent levy on company taxable income above $5 million per year.

Recommendation 22: Child care

The cost of child care significantly impacts on the ability of parents, particularly women, to participate in the workforce. The Commission recommends the Child Care Rebate and Child Care Benefit be replaced with a single, means-tested payment reimbursing parents for a proportion of their child care costs. The new payment should include a work, training, study test and:

  1. should be broadly budget neutral and roughly maintain the current levels of assistance of around 80 per cent for low income families, with a base of assistance of 50 per cent available to all families;
  2. should include in-home care and other types of care that are not currently subsidised; and
  3. with savings from the Commission's proposed changes to the Paid Parental Leave scheme redirected to offset the cost of this expanded child care assistance, with the intent of making the changes broadly budget neutral, including retaining the 1.5 per cent levy on company taxable income above $5 million per year.