Opinion & Commentary
Scrap child-care concessions - cut taxes instead
The Australian Bureau of Statistics reports that it is no longer normal for mothers to stay at home to look after their children, even when they are small. The most common pattern is for the father to work full-time while the mother works part-time.
A key reason many mothers keep working when they start a family is financial. Young couples face high housing costs, and, with more mouths to feed, it can be hard living on one income. But mothers who work when they have preschool children often find a big chunk of their earnings disappears in child-care costs, leaving them little better off.
Predictably, this squeeze on family incomes has led to increasing demands that the Government should do something to help. Equally predictably, given their sensitivity to lobbying and their desire to buy as much voter support as possible, politicians have responded by dipping into taxpayers' pockets.
In 2000, the Commonwealth Government introduced the child-care benefit, a means-tested subsidy of child-care fees. For low-income families, the fee per child is reduced by as much as $144 a week, but even families on $100,000 a year can qualify for some help.
But whenever a government decides to subsidise service charges, it is inevitable that demand will rise while suppliers will seek to push up their prices. This is exactly what happened to child care after 2000. In just four years, fees rose 49 per cent faster than inflation while the demand for places rose.
With an election looming in 2004, the Government swiftly announced an additional package of financial aid for child care. This time support was delivered through a tax rebate that allows parents to claim 30 per cent of what they spend on child care as an offset against their income tax.
The Australian Council of Social Service wants the new tax rebate scrapped in favour of a massive increase in the value of the child-care benefit. The ACTU is demanding that the Government spend $10 billion building a thousand new child-care centres. Business groups are demanding that employees' child-care fees should be allowable as a pre-tax salary sacrifice, and Liberal backbenchers are suggesting that child-care subsidies should increase by 50 per cent.
It doesn't matter how much extra money ministers throw at this problem, the demands for more spending will not go away.
Families Minister Mal Brough identified the core problem in an ABC interview. You have to be aware, he said, that you pull one lever, you affect different families in ways in which you perhaps do not want to. In other words, each time the Government responds to demands from one section of the population with an extra payment or subsidy, it sets up new problems and demands somewhere else. This is a never-ending game that the politicians (and taxpayers) cannot win.
By trying to please all the people all the time, the Government has ended up with an expensive, patchwork system of child-care support that satisfies nobody. And child care is only the tip of the iceberg, for the same problem is evident right across the family payments system.
We make special provisions for single parents, but then we balance this with extra help for couples. We support one-earner families with a special payment, but then we compensate dual earner couples by giving them help with their child-care costs. Everybody ends up paying for everybody else's special assistance in a mad, $20 billion tax-welfare merry-go-round.
The way out of this mess does not lie in yet more benefits, subsidies, rebates and allowances, but in a radical simplification of the entire system.
The Government should remain neutral between women who work and women who choose to stay home to look after their children. The way to do this is not to give subsidies to one group, and then balance them with payments to the other, but is to scrap all family and child-care benefits in favour of dramatic tax cuts for working families.
Tax cuts would allow families to make their own decisions about how best to spend their own money. Families would not need help with their child-care costs if they didn't have to pay so much tax on their earnings.
In preparing his May budget, Peter Costello should therefore resist the temptation to buy off the latest round of lobbying on child care. Instead he should raise tax-free thresholds to take low-to-middle income families out of the tax system so they can afford to pay for whatever arrangements suit them best.
Professor Peter Saunders is Social Research Director at The Centre for Independent Studies.
