Tax cuts will make family benefits worse, here's some tips for reform

These days, patterns of child rearing for young children are diverse. While most mothers have returned to employment by the time the youngest child reaches primary-school age, many care at home full time for at least the first three years or so, and many opt to combine part time employment and part time care.

Employment status of mothers in 2000

The present social-security system offers only limited help with the costs of care for preschool-age children, whether at home or in formal child care. The main payments are Family Tax Benefit (Part B) for single income families, the Baby Bonus, Child Care Benefit, and Parenting Payment for those parents on the lowest incomes.

Family Tax Benefit (Part B) and the Baby Bonus are token payments. The maximum rate of FTB (Part B) for a family with a preschool-age child is just $78 a week, and the maximum Baby Bonus is about $50 a week, though most receive much less. These amounts are based on what the government felt it could afford at the time, rather than any objective assessment of the costs facing parents. They are also inflexible, providing little or no help to parents who combine part-time care and employment. They are poorly targetted. The partners of millionaires may receive both payments, at the maximum rate.

Parenting Payment is more than a token payment. It is paid to the main carer of a child in a low-income family, at the same rate as for unemployment allowances for an adult (around $175 a week for a married parent). So this payment is at least based on a clear benchmark: what the social-security system regards as the minimum cost of sustaining a parent while they care for a child at home. But it is restricted to families with incomes below about $30,000 per year.

No such payment is available to middle-income families, even in the period immediately following the birth of a child, when these families come under the greatest financial pressure. For at least the first three months or so after the birth, mothers are usually advised not to return to employment for the sake of their health and that of the baby, even if they wish to do so as soon as possible. Yet Australia, almost alone among the OECD countries, still lacks a national system of maternity leave or maternity benefits (apart from a small lump sum payment given to most parents after the birth of a child).

For those parents who wish to place their preschool-age children in formal day care, public support is provided through Child Care Benefit. This payment has an important dual role. It offsets child-care costs for parents and it gives the government financial leverage to ensure that child care services are accessible and of high quality.

Unfortunately, many parents cannot secure affordable, quality child care. The average "gap fee" for full-day care services is more than $50 a week. This is more than a low-income family, and many middle-income families, can afford. Moreover, there are long queues for child care in many parts of Australia. Parents in the know place their child on waiting lists before they are born!

There is a strong case for reform of the mish mash of payments that help with the indirect costs of children, especially to extend more help to middle-income families with preschool-age children. The complicated and inequitable Baby Bonus should be abolished. The other payments for parents caring for children at home should be redesigned to offer better and more flexible support for parenting, especially just after the birth (through some form of maternity benefit) and over the next three years.

However, replacing all of these payments and family allowances with a single flat payment, as advocated by some, would not meet the diverse needs of families in a cost-effective way. To offer exactly the same amount of help to families with different needs is false equity.

The families with the highest costs would be short-changed, especially:

• Parents with young children who need help with both child care fees and the cost of staying at home part time;
• Parents with teenage children.

The cost of children varies between families with different numbers of children of different ages, and between parents who care at home and those who use formal child care. Payments for families should reflect these costs. They should be based on the actual minimum costs of raising children, and the ability of different families to meet those costs.

Conclusion

An across-the-board tax cut is like scattering seeds into the wind. A well designed, well targeted boost to family assistance would be much less costly and more likely to bear fruit. It would reduce child poverty and relieve financial pressures on middle income families.

The highest priority should be given to:

• Improving youth allowances for teenage children in low-income families;
• Simplifying and improving payments that help with the costs of at home and formal child care for preschool age children in low and middle income families.