Replace free childcare scheme with tax deductions to kickstart economy – Sydney Morning Herald

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The common thread behind the desire to end the childcare scheme as well as a push from the Coalition backbench to end the JobKeeper wage-subsidy program early is concern about the fiscal cost of such programs. Despite the fact that the government will and should run deficits topping $130 billion for the next two years, there has been a reflexing return to the debt and deficits mantra to which the government was wedded prior to COVID-19.

Yet the way to deal with the debt accrued to get the country through the COVID-19 crisis is to shrink it away as a share of Gross Domestic Product by growing the overall economy. With the government able to borrow long-term for less than 1 per cent, the carrying cost of even $260 billion of new debt is tiny between $2 billion and $3 billion a year out of a $500 billion a year budget.

The real question is how do we get that economic growth?

One possibility is through population growth from immigration. That has been a big part of Australias economic growth story in recent years, but seems unlikely to continue in the foreseeable future. International movement of people is likely to be subdued generally, and there is already pressure from some quarters for the Australian government to restrict immigration and prioritise local workers.

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A second possibility is to increase the productivity of the existing workforce. This has proved hard in recent times, with labour productivity below 1 per cent per annum for the last 5 years and was even negative in 2019. In an economy with increased automation and few game-changing labour-productivity enhancements since the 1990s computer revolution this avenue will likely continue to be hard.

The most likely path to growth is from increased labour force participation. Australias participation rate is quite strong relative to other advanced economies, but there is room to get above our roughly 66 per cent rate. That requires getting parentsespecially womenback into the workforce.

To do so we need a taper, rather than a radical rollback, of childcare support. A gradual reduction in the increased subsidies brought in last month, not cutting them off entirely. That might mean a sliding scale that reduces the current 100 per cent-free model to 90 per cent next quarter, then 80 per cent, and so on.

Of course, free childcare is not the only, or even the best model or use of government funding going forward. Last year we proposed a plan where households could continue to use the pre-COVID childcare subsidy scheme without modification, or opt to forego those arrangements an instead receive a tax deduction for child-care expenditures up to an annual cap.

Having the option to stick with the CCS means that no household could be worse off, but a significant number would be better offmore than 205,000 households, representing 22.5 per cent of households with children. The average couple with children would be $618 per annum better off and households in the bottom 20 per cent -40 per cent of the income distribution would be an average of $626 a year better off.

And from an economy-wide perspective, the plan would boost labour force participation by providing increased access to affordable childcare while removing the high effective marginal tax rates for working extra hours that can sometimes mean that parents can, perversely, earn less on a net basis by working more, once actual tax rates and the loss of childcare subsidies from additional income are factored in.

There were important issues about getting parents who want to back into the workforce, as well as the gender-wage gap which stands at 14 per cent before COVID-19. Those issues are still with us, but we now also need to consider how to boost economic growth in a very challenging environment.

One way to do that is to continue with the current free childcare scheme, although taper it off gradually.

Another attractive way to achieve those goals is by increasing labour force participation through well-designed subsidies. That may not involve free childcare forever, but it certainly does involve repurposing the subsidies introduced in April along the lines of our plan, rather than doing away with them altogether at the end of June.

Rosalind Dixon is a Professor of Law and Director of the Gilbert + Tobin Centre of Public law. Richard Holden is a Professor of Economics at UNSW Sydney.

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Replace free childcare scheme with tax deductions to kickstart economy - Sydney Morning Herald