More parents in work, more children in care by removing the activity test in child care

Removing the activity test on the Child Care Subsidy would support higher workforce participation by women and see thousands more children access high quality early learning.

A new report from Impact Economics and Policy, Child Care Subsidy Activity Test: Undermining Child Development and Parental Participation, shows that the current activity test is contributing to at least 126,000 children from the poorest households missing out on critical early childhood education and care.

Lead Economist at Impact Economics, Dr Angela Jackson said, ‘removing the activity test on the Child Care Subsidy would deliver significant benefits including greater access to early learning for low income children, improving participation, and reducing red tape.’

Children from low-income families are over twice as likely to start school developmentally vulnerable compared to children from high-income families, with lower attendance at early childhood education and care an important driver of this inequality.

‘The Albanese Government has the opportunity to take a step towards universal child care by removing the unfair and inefficient activity test’, Dr Jackson said.

Government figures show that the number of low-income families accessing child care has fallen by 42,000 since the new system was introduced in 2018. The previous Government halved the minimum of amount of child care that low-income families are entitled to from two to one day a week, and has resulted in this substantial fall in the number of families receiving the minimum entitlement.

An independent evaluation of the changes by the Australian Institute of Family Studies in 2022 found that the new activity test has ‘disproportionately impacted on children in more disadvantaged circumstances’ and recommended that it be reviewed.

The activity test restricts the number of hours of Child Care Subsidy a family is entitled to based on the ‘recognised activity’ parents are engaged in. ‘Recognised activity’ can include work, training, studying or volunteering. The fewer the hours of activity, the less the amount of subsidised child care. There is a minimum entitlement to child care of 24 hours per fortnight – equivalent to one day per week – for families earning less than $72,466 a year.

Families must update their activity regularly to ensure they are not overpaid, creating significant compliance burden and risk of overpayment for impacted families. A 2019 survey found half of parents were worried that they would end up with a reconciliation debt if they did not get their details right. This is particularly important for casual employees, that often do not have certainty over their hours of work.

Dr Jackson said that ‘access to subsidised child care influences decisions around work and study. Reducing financial barriers to work is the main driver for women working to increase participation.’

‘Removing the activity test will reduce the complexity of the system and the risk of overpayments, removing barriers faced by low-income casual employees seeking to increase their hours of work.’