Why free childcare is the key to economic recovery

Why free childcare is the key to economic recovery

New research shows it would act as an effective short-term stimulus as well as a long run driver of economic growth.
free childcare economic recovery

New research by The Australia Institute’s Nordic Policy Centre reveals that policies that make it easier for women to choose to go back to work will see the country recover faster from the COVID-19 economic crisis. It will also deliver billions in benefits for all Australians over the long-run.

The report, by Australia Institute chief economist Richard Denniss and senior economist Matt Grudnoff, indicates the federal government’s decision to end free childcare next week is at odds with its economic goals.

“The provision of free childcare provides the rarest of economic policy opportunities – it’s both an effective form of fiscal stimulus in the short term and has the capacity to boost the long-term participation rate and, in turn, the long run rate of economic growth.”

Participating in growth: Free childcare and increased participation

Increasing women’s workforce participation to levels seen in many Nordic countries, through policies including the provision of free childcare, the Australian economy would be up to $140 billion larger.

“The Prime Minister himself has repeatedly highlighted the significant economic gains that have flowed from the temporary provision of free childcare,” Richard Denniss, chief economist at The Australia Institute says. “Not only is free childcare a form of fiscal stimulus, boosting consumer demand by increasing the disposable income of families with young children, but in the long run, it will significantly grow GDP and make Australia a far more equitable country.”

Nordic countries have far more generous childcare policies and much higher rates of female participation in full-time work than Australia.

Female workforce participation rates in Australia fall significantly at the ages when the largest number of people are raising young families. An effective way to stymy this is by helping secondary income earners, often women, re-enter the workforce after the birth of a child.

If Australia’s female workforce participation matched the Nordic countries, the economy would be $60 billion larger, or 3.2% of Gross Domestic Product.

“The empirical evidence makes clear that spending on services like childcare creates more jobs per $1 million spent than expenditure in areas like construction,” Denniss says. “The government’s focus on stimulus spending in male-dominated industries risks stymying economic recovery.”

But there are considerable short-term benefits too. The provision of free childcare provides a significant form of fiscal stimulus spending targeted towards families with young children. Because these families tend to have a very high ‘marginal propensity to consume’, the report concludes that stimulus provided in the form of free childcare is likely to have a larger impact on consumer spending than many other forms of stimulus spending.

Ending free childcare will reduce the disposable income of young families, meaning they will reduce their consumer spending at a time when GDP is already shrinking, and unemployment is rising rapidly.

If the priority right now is to help get the economy going and getting people back into jobs, the provision of free childcare is a uniquely effective policy. The Parenthood’s national survey indicates that around 40% of families using early childhood education and care have lost employment or income due to COVID19. The return of childcare fees next week will place further pressure on household budgets already squeezed, and make returning to work even harder for a third of families who will have to reduce or remove their children from care altogether because of the cost.

The Grattan Institute‘s latest report, The Recovery Book: what Australian governments should do now, recommends the government takes action to address the affordability of childcare as well as extending direct cash payments to households to boost spending.

On all of those measures the provision free childcare is undoubtedly compelling. If the government is serious about wanting to boost Australia’s economy, this ought to be considered. What other policy can deliver short-term stimulus, long-term growth and immeasurably boost the social, developmental and educational outcomes of children?

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