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Abbott's PPL extravagance is a crying shame

Matthew Taylor | Business Spectator | 05 August 2014

Despite the declining likelihood that the government’s reforms to paid parental leave will go before parliament this year, the government maintains that their beleaguered scheme has been neither shelved nor delayed.

Speculation that the scheme might be shelved comes in the wake of the release of the Productivity Commission’s draft report on childcare and early childhood learning which, in the absence of any mention of PPL in its terms of reference, suggested "it is unclear that the proposed changes...would bring significant additional benefits to the broader community beyond those occurring under the existing scheme".

The government proposes to increase the length of taxpayer-funded PPL from 18 to 26 weeks and increase the maximum rate of payment from $11,538 to $50,000, providing the largest payment to the highest income families, in a move that will cost over $5 billion a year by 2016-17.

The Commission’s primary concern is that the additional $3bn of expenditure that the government has slated for PPL would be better spent on policies "where more significant…workforce participation benefits, are likely".

While the Commission has indicated that its proposed childcare reforms might not produce a large increase in labour force participation, there is considerable research which suggests that much of the $5.6bn the Commonwealth spends on fee assistance for childcare makes an important contribution to parents’ labour force participation.

The Commission’s draft report refutes the government's claims that one of the key justifications for its PPL scheme is "getting people back to work so they can pay for the pensions of tomorrow". In fact, the scheme would introduce a new welfare entitlement more likely to reduce the life-time labour force participation of women.

The labour force participation benefits of PPL primarily accrue to low-wage women who might not otherwise work prior to birth. According to the Commission, the current payment of $11,538 "…is significantly more than the value of income support for women working in the unpaid sector". These benefits, which the Commission concedes are modest at best, have largely been realised through the current $1.4bn of expenditure.

When the Commission was asked to design Australia’s current PPL scheme back in 2008, it made it very clear that ‘full replacement wages for highly educated, well paid women would be very costly for taxpayers and…would have few incremental labour supply benefits".

For the 75 per cent of women who receive PPL payments and earn more than the full-time minimum wage, the additional expenditure will not elicit any additional labour force participation -- these women are already employed. They will, however, have an incentive to game the government’s scheme by increasing their hours worked in the year prior to birth to maximise their PPL payment. This is unlikely to offset the additional eight weeks of labour hours lost through the increase in the parental leave period.

If wage-replacement PPL is not going to increase labour force participation and provide a return to the taxpayer, then it is not clear why the scheme requires $5bn of taxpayers’ money. Alternatively, if the objective is to ensure all newborns receive full-time parental care and working women are not forced to finance their parental leave through wage discounts, then there are alternatives.

These objectives could be achieved through a loans scheme similar to the higher education contribution scheme for tertiary education. A parental leave contributions scheme would loan parents the primary carer’s pre-birth wages for 26 weeks. Like HECS, parents would only have to make repayments once their incomes were above a minimum threshold, and repayment rates would be progressive. The loan would be a joint liability of both parents, shifting the responsibility of financing parental leave onto the higher income earning parent -- in most cases, the father.

If the government’s goal really is "getting people back to work", redirecting money from the PM’s gold-plated PPL scheme to childcare subsidies is likely to be a more effective means of achieving that goal. But if subsidies are increased without addressing issues that constrain the supply of childcare services, then any increase in subsidies, even if better targeted at lower income earners, will be transferred directly to providers in the form of higher prices without making childcare more affordable.

Alleviating regulations that increase the cost of providing childcare services and looking at policies that remove barriers to entry for new entrants into the childcare market need to be considered. The Commission’s (draft) recommendation to review staff ratios and qualification requirements is both timely and welcome.

The message from the Productivity Commission is clear: Reforming childcare fee assistance will enhance mothers’ labour force participation, not gold-plated PPL.

Matthew Taylor is a research fellow at The Centre for Independent Studies, and author of Fairer Paid Parental Leave.