New Zealand's childcare is among the most expensive in the world. But tax rebates are not the answer

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Some eight months out from this year’s election, the National Party has launched a new tax rebate policy to help reduce childcare costs. At the same time, Australia and Canada are abandoning their own rebate policies for failing to really address childcare affordability issues.

It might be a good idea for New Zealand to learn from their experiences.

Childcare in Aotearoa New Zealand is some of the most expensive in the world, despite the government spending about NZ$2.3 billion annually on childcare through subsidies and payments to the sector.

National’s Family Boost scheme would give a 25% tax rebate on childcare expenses up to $75 per week to families earning less than $180,000. This rebate is in addition to the extended childcare subsidy announced by Labour last year.

On the face of it, National’s approach will return much needed money to families and has the potential to increase workforce participation. But overseas experience shows there are some fundamental flaws with offering rebates for childcare.

Turning away from rebate schemes

The Australian Labor government has just launched a major childcare review, noting their rebate and subsidy schemes – which have been in place since the mid-1990s – have not achieved the hoped-for affordability outcomes.

Government spending on support to parents has reached almost AUS$9 billion, yet it is estimated childcare costs have risen by 41% for families since 2014.

Canada has also recently moved from tax rebates for childcare, instead embarking on an ambitious public funding commitment to offer C$10-a-day childcare by 2026. The government has committed $30 billion to develop 250,000 new affordable childcare places by expanding the not-for-profit sector.

Read more: If governments were really concerned about tax and the cost of living they would cut the cost of childcare

So, what can we learn from tax rebate funding models overseas?

As seen in Australia, tax rebate schemes are administratively burdensome. Their childcare rebate schemes were added into an existing funding model developed by previous governments, ultimately making the system confusing and complicated for parents and providers to navigate.

Similarly, National’s proposed rebate scheme will add yet another layer to what is now an already complex funding model, including the 20 hour early childcare education payment and the recently extended childcare subsidy.

Rebates ineffective on their own

Moreover, international experience suggests rebate schemes do little on their own to reduce childcare costs in highly privatised childcare markets.

Although money goes directly to parents, evidence shows there are limited benefits to families if there is no cap on the costs that providers can charge.

Any money going to parents risks being absorbed by fee increases. This occurred in Australia under the childcare tax rebate scheme introduced in 2004, with the following decade seeing what sector advocates called a financial “bonanza for private providers”.

But in a sector that is now almost 65% for-profit in New Zealand, any governmental attempt to control price increases risks being seen as “market interference”.

Proponents of rebate schemes argue that fee increases should not happen in theory, because such schemes empower parents as consumers. They can regulate costs through choosing services that best meet their needs, and change services when they are not satisfied.

But research has long shown that viewing parents as consumers of childcare in this way is a political fiction. Childcare markets do not work under textbook supply and demand imperatives.

Read more: How English-speaking countries upended the trade-off between babies and jobs, without even trying

The commonly held notion that parents will “talk with their feet” by changing childcare providers is simply not the case. As any parent will attest, changing your child’s care environment once the child is settled is a move they are loathe to make, even if the service down the road is cheaper.

Furthermore, parental choice in many regions is constrained by the lack of childcare services and long waiting lists. As we see growing privatisation and corporatisation of the sector, the range of choice is further limited.

Time for an overhaul

It is certainly time to consider childcare costs as a crucial issue affecting New Zealand households. But this needs to be part of a much more ambitious funding review of the sector.

Overseas evidence has shown that the kind of intervention the National Party is proposing does little to improve affordability in the longer term, or address other thorny problems such as quality and access in childcare markets.

If we look at Australia and Canada, countries which have had extensive experience of these kinds of funding models, there is now a renewed incentive to explore more universal, publicly-funded childcare options.

This may involve stronger support for community, not-for-profit services, which are a shrinking part of the childcare landscape in Aoteoroa. At the very least, it would require a much stronger sense of market stewardship than is currently in place.

If political leaders are serious about making some real changes for parents, children and the wider sector, we should expect better than to repeat the same mistakes already made elsewhere.

This article is republished from The Conversation is the world's leading publisher of research-based news and analysis. A unique collaboration between academics and journalists. It was written by: Aisling Gallagher, Massey University.

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Aisling Gallagher has recieved funding from the Royal Society of New Zealand, Marsden Fund.