History tells us that falling CPI prices lead to increases in demand: will history repeat itself this time around?

by Jason Roberts

November 06

The views expressed by contributors are their own and not the view of The Sector.

Last week saw the Australian Bureau of Statistics release its Consumer Price Index (CPI) data for the September 2018 quarter.

 

From an early childhood education and care (ECEC) perspective this particular release was of greater significance because it was the first data point to be issued by any Government agency that incorporates the impact of the new Child Care Subsidy (CCS).

 

In this instance, the release captures the degree of impact the new subsidy has had on the price of ECEC services across Australia.

 

How is the childcare CPI calculated?

 

The ABS CPI childcare series aims to calculate the change in the cost of childcare across the eight major metropolitan areas of Australia.

 

The actual number reported is a net number and is calculated by subtracting an estimate of the average subsidy a household would receive from the actual fees charged at a centre which as we know is referred to as the ‘gap’ fee.

 

The subsidy is estimated via modelling that takes into account a range of demographic and market characteristics such as average household gross incomes, number of children in a household, geographic location, type of care, and number of hours in care to calculate the final subsidy level to be applied.

 

What did the September 2018 quarter data tell us?

 

The CPI that was reported on 31 October showed large falls in prices more or less across the board for childcare and confirms that – according to the ABS’s modelling – the dollar savings generated by the CCS have exceeded the price increases put through by ECEC operators in July (some of which were very material) in every state and in some cases by very large margins.

 

  • Sydney net prices fell 7.6 per cent compared to last quarter and 3.9 per cent compared to last year
  • Melbourne fell 19.1 per cent compared to last quarter and 15.9 per cent compared to last year
  • Brisbane fell 9.7 per cent compared to last quarter and 7.8 per cent compared to last year
  • Adelaide fell 12.8 per cent compared to last quarter and 9.4 per cent compared to last year
  • Perth fell 11.5 per cent compared to last quarter and 8.4 per cent compared to last year
  • Canberra fell 19.8 per cent compared to last quarter and 16.6 per cent compared to last year
  • Hobart fell  11.4 per cent compared to last quarter and 9.0 per cent compared to last year
  • Darwin fell 7.6 per cent compared to last quarter and 4.8 per cent compared to last year
  • Average across Australia compared to last quarter fell 12.4 per cent  and 9.5 per cent year-on-year.

 

The importance of the magnitude of these falls cannot be overstated. We now for the first time have an independent assessment of the impact of the CCS on the actual net price of childcare and in doing so are able to progress the narrative away from anecdotal evidence provided by operators or bureaucrats to statistical evidence provided by a government agency.

 

The CCS has impacted household budgets positively – and in some cases very much so.

 

Have we seen a decrease in prices of this size before?

 

But that being said, those who have been involved in the sector for many years would not find this a surprise because a similar outcome occurred in 2000 and then again in 2008.

 

Just like this year, both 2000 and 2008 saw the introduction of a major new subsidy.

 

July 2000 saw the introduction of the Child Care Benefit (CCB), a means-tested subsidy designed to ease the burden of childcare fees for those that needed it most.

 

In the first CPI release post its implementation prices fell on average 12.4 per cent relative to the previous quarter and 8.5 per cent relative to the previous year with Brisbane and Sydney seeing the largest year-on-year falls of 18.9 per cent and 18.6 per cent.  

 

July 2008 saw the introduction of the Child Care Rebate (CCR), a non means-tested subsidy designed to contribute towards out of pocket expenses for any family that meets certain  criteria.

 

In the first CPI release post its implementation prices fell on average 22.2 per cent relative to the previous quarter, and 17.3 per cent compared to the previous year with Melbourne and Darwin seeing the largest year on year falls of 20.0 per cent and 19.9 per cent.

 

And as we know, July 2018 saw the introduction of the CCS and consequent falls of 12.4 per cent quarter on quarter and 9.5 per cent year-on-year.

 

But as well as confirming the magnitude of the CCS savings to families, the CPI release also draws a line in the sand between subsidy regimes from an economic perspective and sets the scene for the post implementation environment to unfold.

 

How do enrolments behave in the months and years after a major subsidy change has been implemented?

 

Unfortunately, the publically available data available for us to assess changes in the number of children attending ECEC services historically is not particularly robust.

 

Of the two key datasets, the Department of Education’s (DET) Early Childhood and Child Care in Summary Reports and the ABS’s 4402.0 – Childhood Education and Care, Australia series, the ABS’s is of more value, even though it is only released every three years, because it commences in 1993. The DET data starts in 2010.

 

The ABS series presents information on the use of formal and informal care; cost and duration of care; working arrangements used by parents to care for their children; attendance at preschool programs; requirements for additional formal care or preschool; and, informal learning.

 

Within the formal care category data on long day care (LDC) attendance is available.

 

In the June 1999 report it notes that there were 242,000 children attending LDC. In the June 2002 report LDC attendance had risen 23 per cent to 297,000.

 

As a reminder, the CCB was introduced on 1 July 2000.

 

In the June 2008 report it notes that there were 408,000 children attending LDC. In the June 2011 report LDC attendance had risen 22 per cent to 496,000.

 

The CCR was introduced on 1 July 2008.

 

In addition, it is worth noting that in the consecutive three year periods following 2002 and 2011 ie: 2002 to 2005 and 2011 to 2014 the increases in reported LDC enrollments were far more muted at 9 per cent and 5 per cent respectively.

 

So there does seem to be some evidence that new subsidy implementations that have a direct impact on net prices have stimulated additional demand for finite periods of time post implementation.

 

But will history repeat itself?

 

There is no reason why it cannot. The demand for care is price sensitive, prices have fallen materially, therefore demand should rise. This has happened twice before. There is no reason why it could not and will not happen again.

 

That of course would be tremendous news for a sector that has been overwhelmed by the new centre supply narrative and the challenges that they have created.

 

Let’s hope that this CPI release marks and the information contained within it marks the end of that narrative and the beginning of a new one, where a step change in the demand for early education and care created by affordability benefits from the CCS becomes dominant.

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