Childcare fees are rising faster than inflation, staff shortages are stretching centres to capacity, and a third of Australians live in a childcare “desert” where children outnumber available places by a ratio of at least three to one.
According to experts, the sector’s business model is to blame.
Like primary education, early childcare is an essential service. But unlike schooling, early childcare doesn’t get funding directly from the government. Instead, it relies on subsidies that come via eligible enrolled families.
The sector is also made up of a mix of providers, many of which need to make a profit.
According to Peter Hurley, director at Victoria University’s Mitchell Institute and an education policy expert, a partly privatised and poorly subsidised essential service is one that “is prone to collapse”.
How does the sector operate?
Australia’s childcare sector is made up mainly of centres run by small-scale operators catering for more than 1 million households across the country.
More than half of the centres are run by private, for-profit providers, according to the Australian Children’s Education and Care Quality Authority quarterly report, which provides a snapshot of the sector. A third are private not-for-profits and 15% are run by state, territory or local governments, state or territory government schools, independent schools and Catholic schools.
While primary and high schools get funding directly from state and federal governments, childcare centres in Australia operate under what is known as a demand-side subsidy model.
“This means the government subsidises … parents’ need for early childhood education and care,” Hurley says.
The childcare subsidy is paid directly to early childhood services, and is then passed on to families as a fee reduction. Families are eligible for different levels of subsidy depending on their household income and the number of their children in care.
The highest level of subsidy is 95% – but the government sets an hourly rate cap, limiting the amount at which childcare will be subsidised.
About 22% of childcare services charge above this hourly maximum, according to the Australian Competition and Consumer Commission’s (ACCC’s) childcare interim report, released this month. And that additional cost gets passed on to parents, who have complained fees are rising faster than inflation and wage growth.
According to the competition regulator, on average, government subsidies offset more than half of childcare fees.
But Australia’s spend is still below the OECD average, with the country spending 0.6% of its GDP on early childhood education and care for children aged five and under in 2019, compared with the OECD average of 0.8%.
What’s the problem with the current model?
Childcare subsidies for parents have increased under Labor – but fees are rising, meaning out-of-pocket costs are also rising.
The ACCC interim report paints a picture of for-profit providers seeking to maintain profitability while balancing operational costs and inflation and offering higher wages to retain qualified staff amid high rates of staff turnover.
Centre-based daycare fees increased by 20% between 2018 and 2022 – or about 4% when adjusted for inflation, the ACCC says. The biggest cost for childcare providers is labour, with staffing costs increasing by 28% between 2018 and 2022. But wages remain low when compared with other service-based industries.
Staff turnover is a big problem in the sector, which the United Workers Union says is mostly because of poor pay.
The other problem is childcare deserts – areas without sufficient childcare providers.
Childcare providers tend to group together in areas where they expect there is significant demand, and where families are likely willing to pay more. For-profit services in particular tend to concentrate in places where they can make money.
“All providers must determine whether the reward for operating in a certain location outweighs the risk – not enough children, not enough staff,” Hurley says.
“If the risk is too great for a provider to operate in an area, with the risk being they will not receive a return on their investment, then providers will not be able to operate in a location.”
As a result, metropolitan areas with a high socio-economic advantage tend to have more childcare centres operating, while childcare centres are often few and far between in regional and remote areas.
The ACCC report warns market forces alone are unlikely to create equal education outcomes or allow more women to participate in the workforce.
“It is a system that puts price, risk and reward at the centre of its design,” Hurley says. Providers try to ensure that “an hour of care is produced in the most ‘efficient’ way possible”.
How do we fix the system?
We might be better off looking at different models for childcare – including overseas models, according to Hurley.
For example, Quebec’s universal childcare system operates on a flat fee payment system where parents pay C$8.85 a day ($10.19). Funding is provided to for-profit and not-for-profit providers by the government in a supply-side model that covers operation costs.
Hurley says the system has led to an increase in both the number of children in early childhood education and care, and in women’s labour force participation. Some research shows the latter has had positive flow-on effects for Quebec’s economy that exceeded the cost of the program.
Shaun Weick, a senior investment analyst at Wilson Asset Management, also wants the Australian government to introduce subsidies for providers, rather than for parents.
If the government does not fund these sectors “on the balance sheet”, they must incentivise private operators to further invest in the sector, and allow them to generate a reasonable return, he says.
“Otherwise, the private operators will just exit the space and the government will be left trying to plug the holes.”
Early childhood care and education is often thought of as a labour market support program – a way to keep parents in work, Hurley says.
“It does have that aspect of helping parents go to work,” he says. “But I think early childhood [education] should be seen as much, much more than that.
“Children start school behind [when they don’t have quality early education] and they stay behind. Interventions at a younger age are the ones that are really important.”
