Childcare policy needs more choice, not just more money
mrc senior fellow alan tudge argues for a bold shake up of australia’s childcare policy.
First published in the MRC’s Watercooler newsletter. Sign up to our mailing list to receive Watercooler directly in your inbox.
For Australians without a young family, childcare policy may seem of little interest. But it matters to everyone. It now costs $15.6 billion a year, rising to $21.1 billion by the end of the decade. And it directly impacts economic growth: in the short term through workforce participation, and in the long term through its impact on the birth rate.
Last week, the Menzies Research Centre released a paper analysing current settings and proposing radical change.
Almost 85 per cent of childcare spending goes to one model of care: childcare centres. One million families use approved childcare, and the gap between male and female workforce participation has narrowed from 36 percentage points in 1978 to about eight today.
But the paper argues that more money for the same model will now deliver less and less. What families lack is not subsidy but choice.
The paper tests current policy against three goals: supporting parents, lifting workforce participation and helping children develop.
On the first, the system works reasonably well for families who want a centre place and can find one. But many can't. Around 700,000 Australians have effectively no access to a childcare centre, and only 1.7 per cent of services operate after 6.30pm on weekdays.
When the NSW Productivity Commission surveyed parents, it found that "above all" they value choice and flexibility, and don't prefer any single model of care. Many parents who want to return to work would prefer care in their own home, or by a friend or relative, but cannot find an arrangement that is financially viable. The current system supports parents who use a centre, and little else.
On workforce participation, the case for more broad-based subsidies, as Labor promises, is weaker than often claimed. The Productivity Commission's 2024 modelling found that spending an additional $8.3 billion a year to cut fees to $10 a day would lift the labour supply of affected families by less than 1 per cent.
For women who want to work more (noting that many don't), the bigger barrier is the effective marginal tax rate: the combined bite of higher income tax, lost family payments and childcare costs when a second earner takes on more work. Many women conclude it simply isn't worth it.
Take a nurse who would earn $90,000 annualised, married to a man earning $95,000, with two children under five. If she works five days rather than none, the family's gross income nearly doubles to $185,000. But their take-home income rises from $86,900 to only $127,000. She earns $90,000 but takes home just $40,100 extra.
On child development, the Albanese government says it wants "as many children into early education and care as we can" because "it's really good for their development". The evidence is not that clear.
Children in formal care for five to 30 hours a week tend to do well, but above that they perform below average. American and Canadian evidence suggests long day care can be detrimental for very young children. The clearest benefits come from preschool in the year before school, and from formal care for children in disadvantaged families.
None of this is a judgement on parents, who make hard trade-offs every day. But more hours in a centre are not automatically better for every child, and sometimes can be worse. The evidence does not support Labor's case for more centre subsidies.
Then there is the birth rate. Australia's fertility rate fell to a record low of 1.48 in 2024, well below the replacement rate of 2.1 babies per woman, and the latest Intergenerational Report projects it will keep falling. Many assume young people don't want children. The evidence says otherwise.
Australians consistently tell the HILDA survey they want around two children, but that economic circumstances prevent this. Policy that closed the gap between the children people want and the children they have would mean about 100,000 more births a year. This should be the focus, not raising our hands in defeat.
The paper proposes four reforms.
First, maintain existing childcare subsidies, but with a stronger means test, and apply them only when parents are working or studying. Labor abandoned this activity test, but there is no public policy reason to subsidise childcare for parents who aren’t working.
Second, allow the subsidy to be used to engage a carer in the family home, as many European countries do. This creates choice and flexibility, and gives real options to families with no access to a centre.
Third, introduce a Grandparents Allowance, modelled on the existing Carer Allowance, for grandparents who provide more than 20 hours of care a week. This would encourage more grandparent care and could save money, as the allowance is far smaller than the childcare subsidy.
Finally, give young families more financial support to address the falling birth rate. The paper proposes lifting the tax-free threshold to $45,000 for a nominated parent of children under six, worth $4,020 a year for working families. In essence, an annual baby bonus delivered through the tax system. It would also considerably reduce effective marginal tax rates.
Reform should start with the family, and the test should be simple: does it give parents more say in how their own children are cared for? Getting this right matters for the families involved, and for the prosperity of the nation.
Alan Tudge is a Senior Research Fellow at the Menzies Research Centre and a former Federal Minister for Education.
