Childcare is an essential service that allows parents to balance work and family responsibilities, while also supporting the development and education of young children. In Australia, childcare has become increasingly important as more parents enter the workforce and rely on childcare services to care for their children. Childcare is also an important factor in the strength of the Australian economy, contributing to workforce participation, economic stimulus, future workforce development, and gender equality. However, the childcare system in Australia is facing challenges, including high costs, burdensome regulation, limited availability, and uneven quality. These challenges have significant implications for families, the workforce, and the broader economy.

In this essay, I will argue that reform to federation in Australia has the potential to make the childcare industry more efficient by reducing duplication and fragmentation in the sector. Currently, the childcare industry is subject to a complex web of regulations, funding arrangements, and governance structures across different states and territories. This can create inefficiencies and redundancies in service delivery, as well as confusion for families seeking affordable and high-quality care. Federation reform could help to address these issues by creating a more streamlined and coordinated approach to governance and service delivery. By creating a more efficient and consistent childcare sector, federation reform could help to improve cost and availability outcomes for children and families, while also ensuring that resources are used more effectively and efficiently.

Childcare in Australia today

There are several types of childcare provided in Australia, including long day care, family day care, outside school hours care, occasional care and community preschools. While the availability of these types of care may vary depending on location and demand, long day care remains the primary choice for Australian parents seeking childcare services. This type of care provides full-day care for children from infancy to school age, typically from around 7 am to 6 pm. Long day care is a popular choice for working parents who require full-time care for their children, as it provides a structured environment with trained staff who can support children's development and education.

Responsibility for childcare is shared between federal, state and territory governments. The federal government is primarily responsible for the regulation and funding of childcare services, including the development of national quality standards and the provision of financial support to families and providers. The regulatory framework is overseen by the Department of Education and Training and the Australian Children’s Education & Care Quality Authority, which is responsible for setting national quality standards for childcare services.1 The state and territory governments are responsible for the delivery and oversight of childcare services within their respective jurisdictions, including the licensing and regulation of providers, and the provision of subsidies to families to help cover the cost of care.  

Funding is provided through a combination of government subsidies and private fees. These fees vary depending on the type of childcare, the location, and the quality of the service. Childcare providers may also receive funding from state and territory governments, grants and donations, and fundraising activities.

The federal government provides several types of subsidies to assist families with the cost of childcare. These subsidies are income-tested and can help to reduce the cost of childcare for eligible families. The main form of government subsidy for childcare in Australia is the Childcare Subsidy (CCS). This is available to families to help cover the cost of long day care. The subsidy is paid directly to the childcare provider, and the amount of subsidy a family receives depends on their income, the type of childcare they use, and the hours of care they need.

What are the challenges posed to the Australian childcare sector?

The Australian childcare industry has faced challenges for many years, but they centre upon a lack of affordability and accessibility. Research has consistently identified several factors that are contributing to this, which can be summarised as follows:

1. Wages are the largest cost for childcare providers, and they have been increasing over time. Early childhood educators are highly trained professionals, and they are in high demand. As such, they command higher wages than in the past. This has led to an increase in the cost of providing childcare services.

2. The regulation of the childcare industry has become more stringent over time, which has increased the cost of compliance for childcare providers. For example, there are now more staff-to-child ratios and higher qualification requirements for early childhood educators. These requirements are important for ensuring high-quality care, but they also increase the cost of providing childcare services.

3. Childcare providers face other operating costs, including rent, utilities, insurance, and supplies. These costs can be impacted by inflation, changes in government policy, and other factors.

4. The demand for childcare services has been increasing over time, which has put upward pressure on prices. This is due in part to changes in workforce participation patterns, with more parents working than in the past.

Inflation is also having a significant impact on the cost of childcare because as the cost of living increases, so does the cost of providing childcare, as childcare providers may need to pay more for supplies, wages, and other expenses. This is leading to higher fees for families and it is making it more difficult for them to afford high-quality childcare. In addition, inflation is also impacting the purchasing power of families, as their income is not keeping pace with the rising cost of living. This is making it even more difficult for families to afford childcare and is contributing to a growing affordability gap in the childcare industry.

To address these challenges, many believe that the solution is to put forward policies that support the affordability of childcare through higher subsidies. The exact cost invested by the federal and state governments varies from year to year — depending on factors such as the number of children using childcare services and changes to government policy — but the amount is increasing. The provision of the CCS is projected to cost the budget $63 Billion over the next decade.

There is no doubt that funding is an important tool to mitigate the cost of childcare and the cost of childcare subsidies like the CCS is partially offset by revenue from taxes, as many families who receive subsidies are working and paying income tax. But the effect of the subsidy has very likely contributed to an increase in the cost of childcare due to increased demand that is not presently being met by enough supply to meet that demand. Further, despite the increased funding, complaints about the inconsistency and lack of availability of childcare in Australia are also increasing.

Families and providers across Australia cite issues such as varying quality standards, regulations, and funding arrangements across different states and territories. This inconsistency is leading to confusion, inequity, and frustration for families and providers seeking high-quality and reliable childcare. Additionally, the inconsistency in the availability of childcare services is creating challenges for families seeking to balance work and family responsibilities. This is demonstrated by the fact that 9 million Australians (35.2% of the population) have no access to childcare at all, which is a problem particularly faced by Australians in rural and regional areas.

One of the main drivers of the lack of accessibility and affordability is how childcare is regulated and funded in Australia. As described above, the childcare industry in Australia is currently regulated by a range of federal and state laws, regulations, and standards. This multi-layered approach means there is a lack of centralised accountability for the provision of childcare services amongst federal and state governments, whilst entrenching inflexible government policy to meet the growing problems in this sector.

This multilayered regulation also places a significant burden on childcare providers, leading to higher costs that are passed on to families in the form of higher fees. It is also limiting innovation in the industry by imposing strict guidelines that may not be flexible enough to accommodate new and emerging models of childcare in particular areas of Australia. Further, the regulatory framework is creating barriers to entry for new providers, making it difficult for smaller operators to enter the market and compete with larger providers.

The net result is a loss to Australian children and families. For this reason, as we go on it is important that we strike a balance between protecting children and families and promoting innovation and competition in the industry.

What are the solutions to these challenges?  

There is broad recognition that the childcare industry in Australia is broken and requires urgent reform. At the time of writing, the Albanese Government has commissioned the Australian Competition and Consumer Commission (ACCC) and the Productivity Commission to come up with possible solutions to some of these problems, with those findings due to be handed down in November 2023.

The solution to these problems requires more than tinkering at the edges of policy. It will demand bold reform across the sector and the whole of government. The first step in this approach would be to reform the federation so that state governments are given responsibility for childcare. This could create a more cohesive, cost-effective and coordinated approach to childcare, which could improve the quality and accessibility of childcare services and benefit both children and families. The reasons for this are as follows.

First, it would allow for decisions to be made at a more local level, accounting for the specific needs and circumstances of each state. State governments could use their local knowledge to develop more tailored solutions to the specific needs of their communities such as providing direct incentives to childcare providers to encourage them to locate in areas where there is a shortage of childcare services. This could help to address issues such as the shortage of childcare places in regional and rural areas in what has become known as ‘childcare deserts’. This would reflect the fact that states are better able to align their childcare policies and funding within their broader social and economic priorities in a way that differs from national priorities.

Second, it would enable more accountability for the quality of educational outcomes for children within their borders from end to end and provide a greater incentive for them to invest in high-quality childcare services. Enabling states to be responsible for education from end to end fits with the concept of the states having full control over all aspects of education, from early childhood education to tertiary education. This model of education governance has many benefits:

1. It allows for a more coordinated and integrated approach to education. With the states having full control over all levels of education, they can ensure that there is a clear progression from early childhood education to primary and secondary education, and then on to tertiary education. This can help to ensure that students receive a consistent and coherent education experience and that there is a smooth transition between different levels of education.

2. It can allow for greater flexibility and responsiveness to local needs and priorities. With the states having full control over education, they can tailor education policies and programs to meet the specific needs and priorities of their communities. For example, schools could play a key role in providing childcare services, particularly in areas where there are limited options, and can work to expand the role of schools in childcare by providing funding and support for school-based childcare programs. This can help to ensure that education is relevant and responsive to local contexts.

Third, it would enhance and incentivise innovation in the sector. Incentivising innovation is an important way to promote the development of new and improved childcare services and states are better placed to experiment with new approaches to childcare and early childhood education given their localised knowledge. One example of how this can be achieved is through funding mechanisms that reward innovative practices and approaches. For instance, the government could offer grants or tax incentives to childcare providers who implement innovative programs that improve outcomes for children and families. Another example is the creation of collaborative networks and knowledge-sharing platforms that encourage providers to share best practices and learn from each other. These types of incentives can help to spur innovation and improvements in the childcare sector, ultimately leading to better outcomes for children and families. State governments are already recognising the role they play in innovating the sector, with the Perrottet Government and Andrews Government in Victoria and New South Wales announcing a landmark policy whereby every family in either state will have access to a full year of free quality preschool education for their children by 2030.

Fourth, in relation to funding, federation reform could also help to address the issue of funding for childcare services. As described above, the federal government currently provides funding for childcare primarily through the CCS. However, the distribution of funding can be complex and uneven, which can make it difficult for childcare providers to access the resources they need. Reform to federation could create a more streamlined and coordinated funding model for childcare that could help to ensure that funding is distributed more fairly and efficiently among the states where there are higher populations and higher demand for these services. This could also help to boost the supply of child-care places and make childcare more affordable for families across the country.

Overall, there are many benefits to giving states more control over childcare in Australia. While greater state control could lead to more tailored solutions and better coordination, critics will no doubt suggest that it could also create inconsistencies and fragmentation, as well as challenges around funding and resource allocation. It will also require the federal and state governments to start a brave conversation about the distribution of revenue among the states to support the growing budgetary demand for these services. Ultimately, any changes to the distribution of responsibilities and funding in the childcare system will need to be carefully considered to ensure that they benefit children and families across the country.

Jane Buncle is a Sydney based Barrister specialising in commercial matters, royal commissions and international commercial arbitrations.

This was originally a chapter in Markets and Prosperity (2023), edited by Harry Stutchbury and published by Connor Court.