Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

The looming task of childcare

16 May 2014

jha-trishaBuried in an innocuous-looking table in Statement 6 of Budget Paper 1 lies this hard fiscal fact: childcare fee subsidies are one of the fastest-growing direct cash payments for which the government is responsible.

In the midst of substantial economising on family benefits and baby payments, there's been a 9.9% real growth in childcare fee assistance since the 2013 budget. By the end of the forward estimates period to 2017-18, childcare fee assistance will have almost doubled.

The rapid growth of childcare costs did not escape the attention of the Commission of Audit (CoA). Yet instead of identifying policy changes that could bring down the costs for taxpayers, the CoA squibbed the issue by proposing to dedicate the money saved through its downsized paid parental leave scheme towards childcare subsidies.

The government last year instructed the Productivity Commission to make recommendations for childcare policy within the current funding parameters. Presumably, this means that the government would like to keep spending on childcare assistance relatively constant after accounting for population growth.

Based on current policy settings, this is laughably optimistic.

If the costs of childcare subsidies are ever going to be brought under control, there needs to be significant changes to the underlying policies. Everything from first principles, to the purpose of government subsidies, to subsidy design needs to be up for debate.

In particular, the regulations for quality in the childcare sector need to be evaluated. Some of the basis for the COAG Early Childhood Development Strategy (including the National Quality Standard which regulates childcare services) includes evidence which doesn't stack up.

In part, the COAG ECD strategy is based on decades-old American initiatives like the Perry Preschool Project and the Abecedarian Project. These initiatives yielded significant benefits, but they were also targeted to highly disadvantaged children and their families.

Contemporary equivalents like Head Start (also American) suggest that even the benefits of expensive, high-quality care to disadvantaged children fade out over time. Therefore, the case for these initiatives being used as the basis of a costly and virtually universal early childhood education and care system is incredibly shaky.

Questions about the evidence base are only a small part of what needs to be answered by government about childcare. With the Productivity Commission report due in October, it's doubtful that the government can avoid making some tough choices in the 2015-16 budget.

Trisha Jha is a Policy Analyst at The Centre for Independent Studies.

 

More aid bang with fewer taxpayers' bucks?

16 May 2014

benjamin-herscovitchPredictably, the aid community has savaged the Abbott government's decision to cap Australia's overseas development assistance (ODA) at $5 billion per annum for the next two financial years.

World Vision Australia chief executive Tim Costello called the move 'devastating,' while UNICEF Australia spokesperson Tim O'Connor claimed that it was tantamount to a 'broken promise to the world's poorest.'

These assessments are inaccurate and unfair.

Although Australia's aid spending is now stagnant, it remains substantial and can produce large development dividends at its current level.

Australia's ODA as a percentage of Gross National Income (GNI) is likely to fall slightly while aid spending is kept at $5 billion per annum, and is expected to stabilise once the aid budget is pegged to the consumer price index in 2016-17.

However, at roughly 0.34% of GNI, Australia's aid spending compares well to the 0.3% of GNI that the OECD's 28 leading bilateral aid donors collectively spend on ODA.

Moreover, Australia is the tenth largest aid donor in dollar terms among the world's wealthy industrialised nations, while the majority of the countries that give more than Australia have far larger tax bases and GDPs.

Criticisms of the government's decision to scale back ODA also overlook the crucial question of the effectiveness of aid spending.

Big aid budgets make countries look charitable, but they reveal little about the real contribution made to poverty alleviation and economic development.

The government was therefore wise to launch a consultation process earlier this year to develop performance benchmarks to improve the effectiveness of Australia's ODA.

Using ODA to assist aid-recipient countries implement necessary domestic policy reforms would be a particularly effective means of improving the return that developing nations and Australian taxpayers alike receive from overseas aid.

As the experiences of India, China and other emerging economies illustrate, and as AusAID acknowledged in 2012, aid is much less important for development than a country's domestic policies.

Consider, for example, how collective land ownership in Papua New Guinea, the Solomon Islands, and other Pacific nations stifles economic growth by sapping individual incentives to efficiently use land.

By subjecting ODA to performance benchmarks that prioritise necessary domestic policy reforms in aid-recipient nations, Australia may well be able to do much more for the world's poor for much less.

Dr Benjamin Herscovitch is a Beijing-based Research Fellow at The Centre for Independent Studies.

 

Revenue to the rescue

16 May 2014

robert-carling For all its rhetorical emphasis on expenditure restraint, the 2014-15 budget in fact relies heavily on revenue to reach approximate balance in four years' time. Total annual revenue is up by a very robust 29% over those four years. This largely takes the form of automatic revenue growth (including personal income tax bracket creep) which always occurs when the economy is growing.

However revenue is set to grow faster than the economy, thereby lifting its share from 23% to 25%, a level that has not been exceeded since the boom years of the 'noughties' (and even then not by much). The fiscal experts who keep telling us the budget is in strife because there isn't enough revenue should throw away their song-sheet.

As well as raking in strong automatic revenue growth, the government has chosen to put some icing on its cake by hiking the top marginal rate of personal income tax and reinstating indexation of fuel excise for inflation.

Such measures will make about one-quarter of the deficit-shrinking discretionary policy effort (as distinct from the automatic revenue and expenditure changes) over the next four years – and less by the end, if the income tax hike is indeed only temporary as claimed.

While this makes a welcome change from the previous government's heavier emphasis on revenue measures, it is still disappointing that the current government has seen fit to resort to increased revenue to the extent it has. The more a government relies on tax increases, the more it is telling us it wants to sustain big government rather than reduce it.

The revenue-boosting measures are ad hoc rather than anything that deserves to be called 'reform'. The hike in the top income tax rate, in particular, reverses some of the decades-long downward trend in marginal rates. It will ratchet up the incentive for high earners to hone their tax-minimisation skills, and ratchet down the incentive for them to do more productive things.

While much of the talk about broken promises is sanctimonious, in tax matters the government should have stuck to its pre-election script and left any changes until after its tax system review.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.