Early childhood education subsidies confuse parents and disadvantage low-income families, states the Australian Competition and Consumer Commission (ACCC).

The system does not deliver accessible and affordable services, the ACCC stated in a report released over the weekend.

It has called for reforms to rate caps and activity tests in childcare subsidies.

Vulnerable children may be missing out because activity testing allots them insufficient childcare subsidies, pushing up out-of-pocket costs for those who can least afford it, the ACCC found.

Meanwhile, rate caps are failing to limit prices and taxpayer spending on early childhood education – partly because they’re set on an hourly basis and not daily, causing confusion.

“We have found market forces under current policy settings are not delivering on accessibility and affordability for all children and families,” ACCC chair Gina Cass-Gottlieb said.

“Quality child care is essential for Australian families. Early childhood education can help children reach developmental outcomes and supports parents and guardians to work and study.”

Billions on subsidies

The ACCC findings are part of a broader early childhood education review directed by Treasurer Jim Chalmers after the Albanese government unveiled billions in new spending on subsidies.

Successive federal governments sought to limit out-of-pocket costs for families in a bid to boost workforce participation (particularly for women) and education outcomes for young children.

But Impact Economics lead economist Dr Angela Jackson said more work needed to be done to ensure the “quasi-market” for early childhood education functions effectively.

“We’re limiting access for kids from low socioeconomic backgrounds, that’s of concern because they’re the children that stand to benefit the most from quality early childhood education,” Jackson said.

Key recommendations in the latest ACCC report have been backed by the Australian Childcare Alliance (ACA), which agreed that daily hour caps and the activity test require urgent reforms.

“A focus must be on how we can drive accessibility and affordability for all families, whilst building a strong workforce of highly-skilled early childhood educators and teachers,” ACA president Paul Mondo said.

“This cannot come at an increased cost to families.”

Affordability a problem

The ACCC made 18 draft findings and seven recommendations for early childhood education reform.

They said affordability is worse in Australia than many other OECD nations, while the current subsidy system evidently disadvantages low-income families and those in remote areas.

For example, the ACCC found households with the lowest entitlements to subsided hours are more likely to be lower income and, conversely, end up paying for more services out of pocket.

That means the activity test – which allots subsidies based on how much work or study parents do – may be making it harder for vulnerable households to take on more work.

Source: ACCC (click to enlarge).

“The current activity test means that those in low-income households who seek to increase their hours of employment, and therefore need more child care, face a higher proportion of out-of-pocket costs as this extra child care is relatively more expensive for them,” Cass-Gottlieb said.

The ACCC wants the government to consider “removing, relaxing or substantially reconfiguring” the activity test to address barriers for low-income households, suggesting that a more specific subsidy entitlement, such as “days of care” could be a more effective way to run the system.

Push to change activity test

Jackson backed changes to the activity test, saying Australia should move towards the provision of three days of child care a week universally.

“This is a significant area of government expenditure that has potentially huge social benefits,” Jackson said.

“But as a quasi market at the moment it isn’t delivering the quality child care across the board that is affordable for many families.”

Additionally, the ACCC said parents find estimating their out-of-pocket costs difficult under the status quo because it’s overly complex and resources that are supposed to help them are failing.

Issues with hourly fee cap

Crucially, evidence gathered by the regulator showed that an existing hourly fee cap, which was designed to limit price increases and by extension taxpayer costs, is not working well.

Source: ACCC (click to enlarge).

One issue, the ACCC said, is that most providers don’t use hourly rates when charging.

“There appears to be a disconnect between the childcare subsidy being calculated on an hourly basis and actual pricing for centre-based day care, which is typically set [daily],” the ACCC said.

“Because of this, the hourly rate cap is unlikely to be a strong price signal for households.”