Looking back over the past 20 years it is hard not to be impressed by the range of approved child care services that are now available to working families. We now have a broad range of services in community-based long day care, private long day care, family day care, outside school hours care and occasional care. Importantly these services are now able to meet most of the demand for care and provide a choice of care for families. Although there are still some localised areas where there are insufficient childcare places to meet the demand, the overall situation is one of oversupply and under-utilisation of available places.

In these circumstances it is not surprising that there is an increasing focus and attention on the issue of the affordability of child care.

However, there are a range of other factors and trends influencing the demand for child care:

• the number of children in the 0 to 4 years age group is declining;
• the school entrance age has been lowered in some states;
• some states have expanded provision and coverage of preschool services; and
• in the labour market, there is a continuing trend to more part time, casual and flexible working arrangements.

Analysis of data from both the Department’s 1999 Census of Child Care Services and the ABS’ 1999 Child Care Australia survey indicates that relatively low utilisation rates are not due to fewer families using child care. (In nearly all sectors the number of families has grown significantly). However families are, on average, using and paying for fewer hours of care. This would appear to suggest that labour market developments and cost are probably the two factors most influential in current demand trends.

Affordability is, of course, a very subjective concept. At the level of the individual, it involves not only issues of actual cost compared to available income but perceived cost versus perceived value. In the case of child care, perceived cost and value can be very much linked to the perceived overall value and returns from participation in employment or other activities. However, it is wrong to simply see child care as one cost of employment or other social participation. Quality child care needs to be recognised as having value in its own right particularly in terms of early childhood development.

What is difficult is defining what level of cost is affordable for families and what is the impact of affordability on families and services. There are many issues often attributed to the cost of care being unaffordable for families. These include closures of services, lower utilisation rates, families choosing informal care over formal care, families using multiple care arrangements and families choosing between different types of formal care based on cost.

This discussion paper will begin to explore some of the key aspects of affordability. This will include an historical analysis of the interaction between fees and government assistance over the last ten years, international comparisons of child care affordability, and an analysis of the current cost of child care for families in Australia.

The analysis in this paper is limited to Commonwealth-approved long day care services, which represent 70% of families using formal care.

Child care fees have increased steadily over recent years, with fees in long day care centres increasing more than in other sectors of the industry. From 1991 to March 2000, centres increased their weekly fees for full-time long day care on average by 6% ($6.40 per week) each year, representing a total increase of 61%, well in excess of inflationary indicators such as the CPI and AWE. However, this increase has not occurred evenly across the years and has slowed in recent years.

Child care fees are not regulated by the Commonwealth. However government policy changes have obviously had an impact on fees. For example, there is clear evidence that the removal of operational subsidy did result in fee rises in the community-based long day care sector. Tracking of fees and changes in government assistance over time has also shown that fee increases have followed or coincided with increases in government assistance. (For example the introduction of Childcare Rebate in 1994 was followed by a significant rise in fees.) Anecdotal evidence suggests that services defer fee increases to coincide with increases in government assistance to avoid having a negative effect on most families.

Over recent years changes to government policy, particularly those made in the 1996/97 budget, have attracted significant attention in discussion of the causes of fee rises. However they are only a small part of the story of child care fees. In fact from 1996 to March 2000, fees rose by an average of 4% pa compared to rises of 8.5% pa from 1991 to 1995. Market forces and other cost drivers such as movements in award wages, service charging practices, changes to State regulations, and increases in overheads such as rates, utilities and insurance appear to have a much stronger influence.

The increase in the price of child care (fees) is consistent with higher prices in other service industries but contrasts with the lower rate of increase in the prices of goods. It is likely that high labour costs are a key factor in both the child care industry and other service industries.

The following chart shows the movement in fees since 1991.

It is clear from this chart that the gap in fees between community-based long day care services and private long day care services widened significantly since 1996 when operational subsidy was removed from community-based child care services. This gap has now become reasonably constant. A rise in private sector fees followed the increases in the community-based long day care sector. Other government policy changes fees such as the introduction of the 20 and 50 hour limits could have had some impact. However, private sector fee rises may also be a market response to price increases in the community-based sector. It is interesting to note that the current dollar value of the gap between community-based long day care fees and private long day care fees is significantly less than the value of the operational subsidy. Fees have also been rising more significantly in centre-based long day care than in family day care.

The fee differences between community-based long day care and private long day care would be an interesting area for further analysis. Private centres would appear to face some additional costs in terms of debt services and the need to return a profit. It may be that the community-based sector faces higher staffing costs. However the 1999 Census of Child Care Services shows only minor differences between staff child ratios and the proportion of qualified staff across the two sectors. It would be useful to obtain better evidence of the cost drivers in the different sectors of the industry to support further analysis.

Government assistance is provided to families and assists in significantly reducing the cost of care. This assistance is progressive in nature. For a low income family (income of $25,000 pa) with two children in full-time long day care, the effective gap fee as a proportion of disposable income drops significantly from 58% before to 15% after government assistance (Child Care Benefit). For a family with two children in full-time long day care and an income of $65,000 pa, the proportion of effective gap fee to disposable income drops from 33% before to 19% after government assistance. Clearly government subsidisation of child care impacts on the cost of child care for families across a wide range of income levels.

The following chart shows the interaction of fee rises, government assistance and changes in effective gap fee for families from 1991 to 2000. The introduction of Childcare Rebate in 1994 had a significant impact on affordability for families as it reduced an average family’s effective gap fee from $33 in 1993 to $32 in 1994, even though the average weekly fee rose by $7.

From 1991 to 1999, the percentage of disposable income going to child care costs has increased. Available data from 1995 shows that the increase has been in the order of 2-5% of disposable income, varying according to gross income level, child care sector used and geographical location. For example, a low income family with one child in full-time long day care would have contributed about 8% of their disposable income to child care costs in 1995. This increased to around 11% by 1999. For a low income family with two children in full-time family day care their contribution was about 6% in 1995 and 10% in 1999.

Fees cannot be considered in isolation, but need to be considered with associated movements in family incomes and other factors. The following chart shows increases in weekly fees, average weekly earnings (AWE), Consumer Price Index (CPI) and government assistance since 1991.

The chart above shows that the rate of fee increase is more than one and a half times that of any of the other factors. Government assistance has increased by more than the rate of CPI and close to the rate of increase of AWE. The effect of fee rises has been that from 1994 to 1999, the gap between government assistance and child care fees has widened. This has resulted in an increase in the effective gap fee paid by families.

The following chart highlights the effective gap fees for low and middle income earners in actual dollars and represented as a percentage of the Childcare Assistance income threshold and AWE respectively. For low income earners, the gap rose from 5% of the income threshold in 1991 to 11% in 1999. From 1 July 2000, this has fallen to 9%. For average income earners, the gap rose from 7% in 1991 to 10% in 1999 and falls to 9% under Child Care Benefit.

The extent to which these changes may have led to significant behavioural changes in labour market participation is unclear. There are other factors such as personal income tax rates, impact of social security entitlements, other costs associated with working, labour market factors and lifestyle choices which also need to be considered. It is also important to note that overall the labour force participation rate of mothers with dependent children aged under 15 has remained steady at 58%-59% since 1996.

The effect of changes in affordability on child care usage is also unclear. Many of the changes in the usage patterns of child care may be the result of an increase in the availability of part-time work. This is demonstrated by the fact that from 1995 to 1999, average paid hours have decreased from 28 hours to 24.5 hours per week in long day care centres. The use of child care is also influenced by the interaction of a range of complex factors which include:

• the declining population of 0-4 year olds;
• a stable labour force participation rate for women with young children;
• more flexible working environments and increasing part-time and casual work;
• a lowering of the preschool entry age in several states;
• better targeting of assistance to manage the unplanned growth of the early and mid-1990s;
• better match of service charging practices with family usage.

Many OECD countries have a formal child care system. However, the way they operate and the contribution of government assistance to families varies greatly from country to country. In general, international comparisons on child care affordability use child care costs as a percentage of gross income as a benchmark. In Australia, this is usually expressed as a percentage of disposable income.

Wisconsin in the United States has one of the most dramatic welfare reform programs in the United States, if not the world. This program provides child care subsidies for all eligible families. The welfare program in Wisconsin is aimed at moving families from welfare payments into work or training. A key target group of the welfare program is single parent families.

Typically parents pay about 15% of the cost of care, however the program is designed so that child care payments should not exceed 12% of the family’s gross income. There is a sliding scale of payment based on income and when families begin to earn higher incomes, that is 200% of the Federal Poverty Limit, entitlement to government assistance ceases.

In comparison to Wisconsin, Mississippi has very limited child care assistance for low income earners. Mississippi has much lower income cut-offs than in other states and child care assistance is not automatic. Families are required to go on a waiting list to receive child care assistance and it is estimated that only 5-8% of eligible families receive this assistance. If a parent is able to access assistance it is estimated that parents typically pay about 30% of the cost of care which is about 5-10% of their gross income.

The United States also has a Dependent Care Tax Credit (DCTC) which allows families to claim a federal income tax credit for a portion of their child care expenses. Families can claim an annual maximum of $US480 for a one child family and $US960 for families with two or more children. The DCTC is not refundable so that families on low incomes who pay no or minimal tax receive little or no benefit from the tax credit. This provides some limited assistance for middle and high income earners.

As in the United States, child care assistance in Canada varies significantly in different provinces. In Ontario, fee subsidies are available for families on the basis of 80% contribution by the provincial government and 20% contribution by the municipalities. Eligibility is determined by a provincially-determined parameters needs test with income being only one of a number of items considered. Each municipality can determine the rates within a range, a situation which creates considerable variation across the province. There is no province-wide maximum income levels for full or partial fee subsidies. As a result of these wide variations it is difficult to make a direct comparison with Australia.

Canada offers a tax deduction for child care expenses up to $C7000 a year for children aged 0-6 years and up to $C4000 for those aged 7 and above. This provides a significant rebate for middle and high income earners.

Fees are set by local authorities and as a result fees vary significantly. In many local authorities fees are determined by parental income and by the number of hours needed. There are single income parents left with less income than the level of social assistance after having paid child care fees. In response to this some municipalities waive fees for low income groups.

In the United Kingdom, child care assistance is provided to parents who work for more than 16 hours per week. There is currently an undersupply of child care places with many families having difficulty accessing affordable care. The cost of care in the United Kingdom has traditionally been very high such that a low income family with one child in care could expect to pay about 20% of their gross income on child care. Families receive assistance for up to 70% of their fees, so that parents typically pay about 30% of the cost of their care.

Sweden is known as a country that has a very high standard of child care and a more generous family policy than most other countries. Publicly-provided child care is available for children aged 1 to 12 years. The aim has been to provide quality child care with full access to those needing care, run principally by local authorities and financed out of public revenue. The public child care system is funded through payroll taxes paid by employers, local taxes and parental fees. Parental fees cover only about 15% of the total costs of care with the other costs being subsidised by the government.

In comparison with other countries, Australian families make a relatively high contribution to the cost of care. However, this cost is a significantly lower percentage of a family’s gross weekly income. In Australia, a low income family with one child in full-time care on maximum Child Care Benefit would pay about 28% of the cost of care. However, this is only about 10% of their gross income. This is partly the result of wages and social security income thresholds in Australia being relatively high. Whilst the comparison in the cost of child care as a percentage of gross weekly income can begin to give some baseline for affordability, it cannot be considered in isolation because of the huge differences in eligibility, scope of the assistance and other benefits provided to families.

The eligibility criteria for government assistance for child care in Australia is far more generous than most other countries. Australia provides government assistance for both work and non-work related care and all families are eligible to some entitlement, including middle and high income earners. The provision of assistance for non-work related care is unique as most other countries do not provide this, and demonstrates the value placed on community participation and social interaction for parents and children.

Australia has additional provisions for families moving from welfare payments into work, education or training. These benefits to families through Jobs, Education and Training (JET) or Work for the Dole are, for instance, far more generous than the Wisconsin Welfare program.

The JET program assists certain groups of Centrelink customers to access child care while they work, study, train or look for work. Additional child care places may be funded for customers who are unable to find suitable, affordable child care. Fee assistance (similar to Special Child Care Benefit) may also be available for JET customers in financial hardship. This assistance is not an entitlement and is assessed on a case by case basis, with a customer contribution based on affordability.

Funds have been provided to JET child care to cover the full cost of arranging and funding child care for participants in the Government’s Work for the Dole initiative. Full cost is covered on the basis that participants should not be out of pocket because of their cooperation with this initiative.

Australia is also able to support children in special circumstances through the payment of additional child care assistance called ‘Special Child Care Benefit’. This includes assistance to children who are at risk of neglect or abuse and for families in financial hardship.

Special Child Care Benefit is a short term entitlement which can cover the full fee charged to the family, effectively providing free care for the child.

The historical discussion of fees, incomes, government assistance and CPI has been able to provide some background information on affordability. However, to consider the current situation for families ,an overview of the usage of child care services is required. This will assist in determining the average hours used by families and the fee that families pay for that usage. This information will assist in considering the actual impact of Child Care Benefit on affordability in typical situations.

Currently, there is a large range of approved child care services that are available for families. Fees charged by these different service types vary significantly as does the type of care provided and hours of operation.

The following chart shows the percentage of families utilising different sectors of formal child care, and the average fees of each sector.

Not only do families use different types of child care but the fees charged in these different service types vary. The 1999 Census of Child Care Services is available to provide detailed information on the usage and fees charged by different service types.

The following pie charts utilise the 1999 Census data and show the percentage of children using different hours of care and the average fee paid by these children, by different service types.

It is important to recognise that hours of child care used by families and the charging practices of services have a great impact on affordability of child care. Data shows that across long day care and family day care, close to 70% of children use care for less than 30 hours a week. In fact, most children use between 10 and 30 hours of care. In long day care, around 57% of children use between 10 and 29 hours of care (usually 1 to 2 days of care per week). In long day care, about 20% of child use more than 40 hours of care (in effect full time). In family day care, 26% of children use between 1 and 9 hours of care, 48% use between 10 and 29 hours and only 15% use over 40 hours. The higher percentage of children using under 10 hours of care in family day care may reflect the availability of an hourly fee structure.

The hourly rates detailed in the pie charts represent an average of the actual fee charged for those hours of care. This does not include any government assistance. To compare the charging practices of services for the hours of care booked, the rates are expressed as an hourly figure and will not represent a weekly fee charged by services for full time care.

The pie charts demonstrate the varying charging practices of services. The 1999 Census indicates that most long day care services have at least two different types of fee structures; weekly and daily. In family day care, it is more likely to be an hourly or weekly fee.

It can also be seen that the hourly rate charged for less than 30 hours of care is higher than the rate charged for more than 30 hours. To compensate and support the provision of more flexible child care, the new Child Care Benefit provides a part-time loading for both long day care and family day care. This increases the affordability of part-time care for families.

In community-based long day care, the difference between the lowest and highest hourly fee charged is about 18%. The difference is about 28% in private long day care and only 3% in family day care. The latter reflects the more common practice of family day care charging by the hour regardless of hours of care used.

In addition, the Census tells us that approximately one-third of all long day care services charge a differential fee which is dependent on the age of the child. This also impacts on the affordability of care for some families.

Changes associated with A New Tax System (ANTS) make a positive impact on factors that influence decisions to participate in the labour market. This includes lower personal income taxes, and relaxed income tests for family payments and parenting payments. Child Care Benefit (CCB) results in increased government assistance with the cost of child care decreasing across most income ranges and circumstances. For example, the proportion of effective gap fee to disposable income for a family with an annual income of $25,000 and two children in part-time long day care has increased from 10% in 1996 to 12% in 1999. This figure will drop to 9% under CCB.

The following charts indicate how affordability has increased through the introduction of the CCB. CCB will significantly benefit low and middle income families. The charts also show a smoothing and simplifying effect of the rate of assistance under CCB across all income levels compared to the irregular effect of Childcare Assistance and Childcare Rebate.

CCB decreases the percentage of disposable income that families spend on child care. The percentage of disposable income reduces to under 10% for low income families in long day care.

Chart 10 indicates the effect of CCB on family day care. Comparing the two charts, it is clear that CCB has a greater effect in family day care where the average fee is lower. For a low income family utilising full-time family day care for one child, they can expect to spend a little over 4% of their disposable income on child care.

From the previous analysis of the child care Census data, it is clear that families predominantly use part-time care and usually only have one child in care. The following scenarios give an indication of affordability for typical families using care. These family types have been chosen from Census data — see Appendix 1. For each of the sectors, the most common family type was chosen according to the following:

• the range of hours with the highest percentage of children;
• the average fee for this group of children; and
• the average hours paid for this group of children.

An average family income was then determined from this group of part-time families.

As 20% of all children in long day care use full-time care, a full-time family has also been profiled in the private long day care sector.

Family 1 has an income of $50,000 pa and pays $70 pw for 20 hours of community-based care.

Under Childcare Assistance and Childcare Rebate, this family was eligible to receive a total of $26.30 pw ($16.30 in CA and $10.00 in CR) in assistance. The family would have contributed $43.70 pw hence paying an effective gap fee of 5.5% of their disposable income.

Under the new system this family is eligible for $35.24 pw in Child Care Benefit and contributes $34.76 pw - an overall increase in assistance of $8.94 pw. Thus, the family would pay an effective gap fee of 4% of their disposable income.

Based on a 60%/40% income split, this family should receive an increase of $29.47 pw from the other elements of the ANTS package, meaning the family is $38.41 pw better off overall.

Family 2 has an income of $27,000 pa and pays $67 pw for 22 hours of private long day care.

Under Childcare Assistance and Childcare Rebate, this family was eligible to receive a total of $43.70 pw ($42.50 in CA and $1.20 in CR) in assistance. The family would have contributed $23.30 pw hence paying an effective gap fee of 4.8% of their disposable income.

Under the new system, this family is eligible for $59.05 pw in Child Care Benefit and contributes $7.95 pw (1.5 % of post-ANTS disposable income) - an overall increase in assistance of $15.35 pw.

Based on a 100%/0% income split (one partner studying), this family should receive an increase of $56.86 pw from the other elements of the ANTS package, meaning the family is $72.21 pw better off overall.

Family 3 has an income of $35,000 pa and pays $163 pw for 50 hours of private long day care.

Under Childcare Assistance and Childcare Rebate, this family was eligible to receive a total of $97.25 pw ($77.80 in CA and $19.45 in CR) in assistance. The family would have contributed $65.75 pw hence paying an effective gap fee of 11.1% of their disposable income.

Under the new system, this family is eligible for $108.92 pw in Child Care Benefit and contributes $54.08 pw (8.8% of post-ANTS disposable income) - an overall increase in assistance of $11.67 pw.

Based on a 60%/40% income split, this family should receive an increase of $19.90 pw from the other elements of the ANTS package, meaning the family is $31.57 pw better off overall.

Family 4 has an income of $50,000 pa and pays $45 pw for 15 hours of family day care.

Under Childcare Assistance and Childcare Rebate, this family was eligible to receive a total of $18.30 pw ($15.60 in CA and $2.70 in CR) in assistance. The family would have contributed $26.70 pw hence paying an effective gap fee of 3.4% of their disposable income.

Under the new system, this family is eligible for $32.03 pw in Child Care Benefit and contributes $12.97 pw (1.6% of post-ANTS disposable income) - an overall increase in assistance of $13.73 pw.

Based on a 60%/40% income split, this family should receive an increase of $29.47 pw from the other elements of the ANTS package, meaning the family is $43.20 pw better off overall.

All of these typical families see an increase in child care affordability under Child Care Benefit. This is enhanced by their increased benefits under ANTS.

These realistic scenarios provide a useful framework for comparisons with other benchmarks of child care affordability.

Affordability has been identified as a key issue by peak welfare organisations such as the Australian Council of Social Services (ACOSS) and the Brotherhood of St Laurence. In its 2000 Budget statement, ACOSS claimed that the cost of care was a significant problem for many families. ACOSS referred to a range of surveys by community organisations which found that the decrease in affordability has led to reduced usage and the poorest families withdrawing from formal care.

ACOSS suggested that the Childcare Assistance ceiling should be lifted by at least $5 per day or $25 per week for full-time care. This would reduce the average contributions that parents make to the cost of care to 17% and would mean that low income families would typically pay about 5% of their disposable income on child care. ACOSS also suggested that the Department should establish criteria to assess affordability levels for different families.

The Brotherhood of St Laurence has also recently released data claiming that the cost of care was a barrier for low income families. The Brotherhood recommended that a further increase in subsidy was needed to restore affordability levels to the early 1990s. This equates with a low income family using full-time care paying about 20% of the cost of care which would be approximately 6% of their disposable income.

It would seem that both of these groups have benchmarked affordability at families paying around 5-6% of their disposable income on the cost of care. There are other groups who claim that child care should be free. However, if there was no payment by the parents for child care, there would be no pressure on the centres to contain fees. In order to contain costs, fee controls would need to be introduced by the Government.

What is most striking in this initial discussion of affordability is the range of complex variables which contribute to affordability of child care for families.

It is clear from the information presented in this paper that fees have risen rapidly since 1991, well in excess of AWE or CPI. This in turn has caused a rise in the effective gap fee paid by parents. The percentage of disposable income that families outlay on child care costs seems to be one indicator of child care affordability and one which different researchers on affordability are using. To determine this, government assistance for child care needs to be considered for different family types. What needs to be established is an appropriate benchmark for all families in a range of different child care sectors.

International comparisons assist with some of this analysis and indicate that whilst Australian families make a relatively high contribution to the cost of care, the cost is a significantly lower percentage of their weekly income. However, further work is required to more fully develop and understand the comparisons.

The introduction of Child Care Benefit adds a new dimension to the picture. Child Care Benefit is clearly assisting families with affordability but its effectiveness varies greatly when the fee charged by individual services and differences between the sectors is added into the equation.

This poses a number of areas that require further investigation:

• How does the fee charged by services in different geographical locations and in different child care sectors influence the disposable income of families. For example, are there high fee geographical areas and what are the income profiles of the families in that area? How does this affect a family’s choice of care?

• Are they due to the nature of the workforce, cost of physical infrastructure, cost of providing different staff such as a preschool teacher or a music teacher?

• Families are predominantly using part-time care. This may be attributed more to availability of part-time work than to affordability. A detailed analysis is required of the factors which may be contributing to this such as price, supply, subsidy, family income, wages, CPI, AWE, quality and charging practices.

• What benchmarks do we have and what do we need to develop to determine an appropriate level of government assistance which compares internationally?

Whilst Child Care Benefit improves affordability of child care, further research is required to develop a comprehensive understanding of factors affecting the affordability of child care.

Australian Bureau of Statistics (1991-2000), Average Weekly Earnings (6302.0).

Australian Bureau of Statistics (1998), Child Care, Australia 1997 (4402.0).

Australian Bureau of Statistics (2000), Child Care, Australia 1999 (4402.0).

Australian Bureau of Statistics (1991-2000), Consumer Price Index (6401.0).

Department of Family and Community Services (2000), 1999 Census of Child Care Services (unpublished data).

Department of Family and Community Services (2000), 1997 Census of Child Care Services (unpublished data).

Ontario, Canada

www.childcarecanada.org

www.gov.on.ca/css/page/services/cc.html

www.cprn.com/pubs

Mississippi, United States

www.state.ms.us/its/msportal.nsf?open

Sweden

www.swednet.org.uk/embassy/emb03h2.html

United Kingdom

www.dfee.gov.uk/childcare/index.htm