Canada is rolling out childcare for $10 a day. Could it work in Australia?

Sascha: [00:00:02] Welcome to the Dives, a podcast that asks Who said business news needs to be all business? In July, the Australian government put a massive stimulus into the childcare system, increasing the childcare subsidy payments for many families in this country. Over 1 million households used childcare last year. That's 1.275 million children. And currently there are two broad reviews about how the system works that are underway. Still, even with significant funding. Childcare is really expensive for most families. So when I read that our Canadian neighbours are looking at Australia and saying Nice try, but you guys have got it all wrong, I wanted to know why and why they say smoke. Because families that only pay $10 a day for childcare. It's Friday, the 25th of August and I want to know what is the economic argument behind Canada's childcare model and is it a better solution than Australia's? To talk about this today I reached out to a Canadian economist, Professor Gordon Cleveland, to further explain that model to me. But before we get to that chart, here's a little bit more context I didn't talk about in the intro. According to Care for Kids secondary year, the National Daily average cost of childcare, it's $129.93. And as I said in the intro, in Australia we have the childcare subsidy. It's the largest form of child care assistance in Australia and it's provided by the Federal Government primarily. This subsidy reduces the costs for families with children who are attending long day-care and it also reduces the costs for out of school hours care, family, day-care and in-home care. It became available to families on the 2nd of July in 2018, and as I said in the intro last month, on the 10th of July in 2023, most families using childcare will now get more subsidies, and some families who were previously not eligible are entitled to receiving it. So, for example, if you earn $180,000 annually as a family, instead of that child care subsidy only covering 50% of that hypothetical 129 93, it's now going to cover 70%. This increase is costing the government $5.4 billion, and it was promised as a solution to getting more women into the workforce. However, anecdotally, I'm certainly hearing of childcare centres immediately escalating their fees. So a lot of that subsidy isn't really doing much to the bottom line. As I said, I'm not an economist, so I reached out to the Canadian professor Gordon Cleveland to explain this model further. Here is our conversation. You mentioned in an interview that I heard you do with the ABC that Australia's approach to funding parents, which is the demand side instead of the services or the supply side in childcare, is an example of what not to do. Can you elaborate on why and also explain how Canada has approached it from the kind of opposite solution? 

Gordon: [00:03:09] Yes, well, we did something in most of Canada quite a bit like you. For many years there was a subsidy model, basically a childcare subsidy model oriented towards lower income families. But it never really worked. It didn't really reach the low income families particularly well. Yes, there were certainly a fair number of them that used subsidy to get into childcare, but the vast majority were outside of it and it didn't make it affordable for parents. Our fees were going up and up and up. We would do studies on them every year and every year. They were, you know, quite a bit higher than inflation, more than they were the year before. And so I look at Australia and I see, okay, you're going down that road to everybody, sort of trying to throw more money into the system to make it accessible for families. And after a few years you look back and you say, gosh, it had an influence for a little while and all of a sudden it's as unaffordable as it ever was before. And so what we've now figured out is that that isn't the way to go about it. And we had the advantage because of the splits in our political system. Quebec, which is our second biggest province, acts as if it were a separate country. What they did is they said, okay, let's do it. We're going to move immediately from where we are right now to make childcare available at $5 a day. This was back in 1997. Now it turns out that that government didn't really realise how popular it was going to be. So they did their forecasts and said, Oh, well, you know, another 10% of families will want to use it. You know, we're at 20, 25% of the family. He's using it now. Probably another 10% will use it. And, you know, so it won't cost us that much money. Well, of course, it turned out it was enormously popular. 

Sascha: [00:05:09] Yeah. 

Gordon: [00:05:09] And so parents flooded in to try and get child care. And they had lots of problems over the years to try and bring the supply up. But now they're at a situation where the amount of supply of child care and the amount of demand for it is about right. With about 70% of families in the 0 to 4 year old range using it. And it's been enormously successful and enormously popular. Parents absolutely rely on it. 

Sascha: [00:05:40] I want to get into the fixed fee and the implications of that in a moment. You said this program was rolled out in Quebec a couple of decades ago. Now it's now being embraced by the rest of Canada. What did you see in macroeconomic trends that encouraged the whole country to get behind this model? 

Gordon: [00:05:59] Yeah, and this is an incredible story because lots and lots of people that you wouldn't necessarily have expected to be the champions of child care at five or $10 a day became the champions of it. Very notably, the governor of the Bank of Canada, Reserve Bank, came out and said, we need this in the rest of Canada. And so what was it about Quebec that was so convincing as much as anything else? And it's been now very well studied. It was the impact on mothers labour force participation because that's an immediate impact. Everybody likes it in terms of the effects on children and that's good, but that takes a long time. The impacts on children over their lifetime. But in an immediate sense, because Quebec had previously, previous to 1997, it had had a lower female participation rate than the rest of Canada. And quite famously, what happened is it took off like a rocket and it went now well above Quebec's labour force. Participation rates of women are essentially the highest in the world now. And so, you know, we're talking about 85% and more of women in the 20 to 44 year age range in Quebec are in the labour force, whereas now in the rest of Canada that number is more like 80% are in the labour force. And it turns out that that five percentage point difference makes a lot of difference. So that very good economists did the calculations and said, okay, I think at that time this is a few years ago an extra 70,000 mothers of children, 0 to 5 years of age who are now in the labour force that would not have been in the labour force. And if you do the calculations, that has a lot of impact on tax receipts. Yes, those women are earning income and they bring extra money into the government, but also there's less social welfare and different things like that. So you take that into your calculation, but then you also add the impact on economic growth itself, because those women that are in the labour force allow more to happen in terms of business, in terms of production. And when all of that was added together, the calculation at that time in Quebec was that actually the child care system more than paid for itself. The returns. And so that makes it incredibly attractive to a much wider group of people than would normally be interested in child care. And that's been the story in the rest of Canada that all kinds of people have said, Yes, I like it for its effects on kids. So I know the literature on the effects on kids. Yes, I like it because it's especially important for low income and disadvantaged children. But gosh, if it even comes close to paying for itself, that's got to be a very good program. It actually had these impacts on the labour force participation. So a lot of people talk about it as a theoretical possibility. But does the design of your program actually trigger this change in behaviour? That was the key for Quebec that it really did. There were big behavioural changes in terms of women entering the labour force that would not otherwise have entered the labour force. 

Sascha: [00:09:30] Yeah, it's really powerful when you can actually well have that demonstration of, of the difference that it makes. It is, as you said, it's not theoretical, it's actually proven in what's happened. I want to go back to the importance. We've kind of talked about the macro economic results of this program, but you talked earlier about the fixed fee and how important that was to individuals and families. Can you talk a little bit more about why that matters in terms of economics ? Individual families are able to plan in that way. 

Gordon: [00:10:02] Yeah, that's an interesting one. I'm a professor of economics, so I think about economic things. And you know, when you study economics, you don't learn that a fixed fee for childcare would make much difference than just lowering the fee for childcare. Right? That's not part of what you learn or think about or theorise about. But in Quebec, it seems to have been really, really important. But when they look back at Quebec and say, Why did it work so well, the fixed fee features very prominently in it. And the rationale for that is, you know, when when you talk to parents, you point this out, parents say, I know what's going to happen. I knew it for a long time. I knew it when I was in high school, thinking about myself growing up, being an adult, getting married or not getting married, having children. I knew that Quebec has, and Quebec does have a generous parental leave program. It has $5 a day. Now it's $8.75 a day. Childcare available for 0 to 4 years of age, whether you're an infant, toddler, preschooler and then in the school system that continues, child care is available through the schools for, again, $8.75 a day. So I know when I'm thinking about what it means to have children, that I know how much it's going to cost me to deal with childcare for my entire child's life. And until the child is 12 or 13 years of age. And so it's made it possible for parents to to plan in a way that it just doesn't when you say, okay, well, here's this very complicated formula, and if your income is such and such, and then if and only if you earn a little bit more money, you'll pay a little bit more. And then, you know, you get all those kinds of things in a in a sliding scale or a non fixed fee system. That's what happens. And then of course, you've got the problem that the childcare providers in Australia may increase the fee by 20% or 30%. Right? So even if you've got a generous government program, all of a sudden the amount you as a parent have to pay runs out of control and you just didn't predict that you didn't know about it. So in Quebec there is this knowledge about exactly what's going to happen. And so families have really. Been able to plan both labour force participation. Division of responsibilities in between male and female. You know, when you're going to be in and out of the labour force, all those kinds of things in a way that, you know, we as economists didn't kind of really twig on at the beginning, but but now appears to have been enormously important. 

Sascha: [00:12:48] I'll be right back with more of my conversation with Professor Gordon Cleveland in just a moment. Welcome back. You're listening to the Dive. I'm your host, Sascha Kelly. And today I'm talking about the economic argument behind Canada's childcare model, which cost families just $10 a day. I wanted to know more about this, so I reached out to Professor Gordon Cleveland. Let's get back into our conversation. It's interesting that you mentioned that example as a hypothetical, because I was reading about the new Australian model. The increase that the government put into those subsidies came in last month, which is costing the Australian Government $5.4 billion. But anecdotally, from what I've heard from many people who rely on childcare, it's that the cost immediately went up. So the actual practicality of seeing that subsidy affect their bottom line has eventuated. 

Gordon: [00:14:02] Yeah, and that's true. Again, go back to first year economics. What do we exactly expect? If you as a government pour billions of dollars into a market, which is a free market in which the providers are allowed to set their own fees, what exactly did you think was going to happen to those fees? I mean, that is in probably the first or second week of your economics program, you learn things like that. So, you know, it shouldn't come as a surprise. But nonetheless, it seems to, because really what we've begun to do in Quebec and now in the rest of Canada, is to say, well, child care is not a market like the others. We shouldn't treat it as a market like the others. It is something like a public service. We want to structure it that way so that it really works for parents rather than having a system that really works for childcare operators. You know, that's, you know, and so it's been kind of a eureka moment for the rest of Canada, which Quebec learned a lot before us, that structuring child care this way is the right way to go about it. And I'm not saying it's going to be easy because it isn't easy, but nonetheless, we are convinced that is the right way to do it. 

Sascha: [00:15:17] I do want to just ask you before I let you go. No model, of course, is perfect. I have been fascinated reading about the Canadian model. But in your opinion, where are the areas for improvement in the Canadian system? I think in another interview I heard you mentioned that there's still challenges about wages for childcare workers, but are there any others that you could present in the kind of counterargument? 

Gordon: [00:15:43] Yeah, I mean, the wages of childcare workers, definitely. That's when you have an award system. So actually there's a uniformity in childcare wages across different providers. That's not true in Canada. And so wages are just all over the map. And then the other part of it, which is extremely important, is that we're still only at I'm not sure what the number is, 35 to 40% coverage of our 0 to 5 year olds. So you've got to build capacity and supply very quickly, and we haven't yet figured out how to do that. That is a huge problem. I mean, if I were advising Australia, I'd say decide on the right direction to go and you can tell. What I would say is the right direction to go, but then say, okay, let me work out the transition towards what are all the different steps that I take and I'm working towards an end and the expansion of services in the not for profit and public sectors would be a key thing to do early on. Right. You are going to have to develop a funding formula to pay operators and that's not trivial. You've got to divide down what are the legitimate costs of producing child care and what are the illegitimate costs. And a lot of the illegitimate costs will be artificially boosted. Real estate prices, which I know have been boosting up fees in Australia. So you're going to have to figure out how to address that, some part of which is the illegitimately high cost of care. And you need to figure out how to get that under control. 

Sascha: [00:17:21] Gordon, You've just given me so many things to think about. I've really enjoyed having the opportunity to ask you all these questions and you've been incredibly generous with your time. So thank you so much for joining us on The Dive today. 

Gordon: [00:17:31] Thank you.

Sascha: [00:17:34] Thank you so much for joining me on the dive. Lots of thoughts after that conversation. Get in touch with us, all the links in the show notes below. But I will be back in your feed on Monday. Quick favour to ask before then. You know what's coming if you're a regular listener. But please can I ask for one quick favour? Send this to a friend who you think will enjoy it. It is the. Single best way for our podcast to go, and we really appreciate it. I'm Sascha Kelly. Until next time.