When the Australian economy is desperately in need of new sources of productivity growth, working mothers have offered one, only to be turned away in last week’s budget. Reducing the punishing work disincentives inherent in the childcare subsidy system would enable talented, skilled young women to work more hours each week if they so desired.
Despite numerous pre-budget representations from women, including distinguished economists, the government said no. Labor leader Anthony Albanese said yes. Then the government attacked him for wasting money.
Philosophy is at the heart of the disagreement. The Coalition views government childcare support as social welfare. Women’s groups and Labor consider it an investment in productivity and workforce participation that, if properly structured, offers economic returns much greater than the budgetary cost.
The budget papers do not dispute the need for productivity growth, Budget Paper No. 1 mentioning it 17 times and analysing the effects of poor productivity growth on the economy.
Despite productivity growth weakening for several years before curling up its toes and dying the year before the COVID-19 pandemic struck, the budget optimistically assumes it will revive to its average annual historical growth rate of 1.5 per cent.
But if its second coming falls short by just 0.25 per cent per annum, the budget papers confirm economic growth and government revenue will be lower and government debt will be even higher than the $1,700 billion already projected.
Wouldn’t you think, then, that the government would be actively seeking out every new source of productivity growth?
It did go hunting and found some. The temporary expansion of instant asset write-off to larger firms is a form of investment allowance that I have been advocating since 2015 https://www.afr.com/policy/gsts-mystical-powers-in-tax-reform-package-overrated-20151123-gl5ghs https://www.afr.com/opinion/craig-emerson-there-is-a-growth-alternative-to-cutting-company-taxes-20160606-gpchqd https://www.afr.com/policy/economy/policy-blunders-prolong-the-pain-20200907-p55sze
The expanded investment allowance could help attract productivity-raising foreign investment, although global competition will be intense as countries effectively bid for it through new concessions in their tax systems.
A cash flow tax https://www.afr.com/policy/economy/road-out-leads-back-to-productivity-20200420-p54lbe would have been far better.
But why was reform of the childcare subsidy rejected? The government claims women up the income scale don’t need it. If childcare support is viewed as social welfare, that argument has some force.
But if the childcare subsidy is understood as an economic boost to female workforce participation and national productivity, then the answer is different.
The way the childcare subsidy interacts with the personal tax system and the family tax benefit, women higher up the income scale face work disincentives as high as 120 per cent. That means the family budget would shrink by 20¢ for every extra dollar the mother earned by increasing her working days from four to five a week.
Many men consider a top personal tax rate of 47 per cent excessive, unjust, even punitive. But it seems an effective marginal tax rate for higher income working women of 120 per cent is okay.
No wonder Australia has a persistent gender pay gap, income gap and superannuation payout gap.
But it’s not just women on higher incomes who are penalised for working harder. In the case of a father working full time for $80,000 a year and the mother earning the part‐time equivalent of $40,000 a year, she keeps just 4¢ in each extra dollar earned from increasing her working days from three to four a week.
Let’s look at a couple on the minimum wage. If the mother increases her working days from three to four a week, she takes home less than $2.40 an hour.
Successive governments have agreed that taxpayers should provide support to young people going to university, viewing a university education as a productivity and participation enhancer. Now 58 per cent of university graduates each year are women.
But when those women have babies and return to the workforce, the government seems relaxed about destroying their incentive to work extra hours.
The childcare reform announced by Albanese seeks to legitimise aspiration by rewarding effort. It’s consistent with a key recommendation of the ALP’s post-election review that Labor should develop a handful of signature policies in the Hawke-Keating reforming tradition – reforms that laid the foundations of almost three decades of recession-free economic growth.
President of the Economic Society of Australia, Danielle Wood, and her colleague, Kate Griffiths https://www.afr.com/policy/economy/cheaper-childcare-pays-for-itself-20201011-p563xj have estimated Albanese’s plan would increase hours worked by 11 per cent, providing a GDP boost of more than double the additional cost. And that doesn’t include the productivity benefits.
The government claims the Albanese reform is unaffordable. We are expected to believe that public debt reaching $1,700 billion is entirely manageable but if it gets to $1,708 billion then that’s a debt and deficit disaster.
Let’s leave the final observation to the budget papers: “The COVID-19 pandemic is projected to lower Australia’s potential output growth in the near term, by affecting all three supply-side drivers of growth: population, participation and productivity.”
Wouldn’t you think the government would embrace reform of the childcare support system as a welcome means of boosting two of those three Ps – participation and productivity – instead of dismissing it as a waste of money?
Craig Emerson is a distinguished fellow at the ANU, director of the Australian APEC Study Centre at RMIT and an adjunct professor at Victoria University’s College of Business.