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Unpacking supply side subsidies and direct price controls in an ECEC context
Jason Roberts
Oct 09, 2023
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In the wake of the release of the Australian Competition and Consumer Commission’s (ACCC) second Childcare Inquiry “interim” report the seven draft recommendations published have been of interest as the early childhood education and care (ECEC) community digests the findings.
Of particular note was draft recommendation seven which read:
The ACCC supports further consideration of supply-side subsidies and direct price controls. Some changes to the policy settings are likely to reduce the impact of the hourly rate cap as an indirect price control, and may warrant a shift to direct price controls supported by operating grants for regulated childcare providers.
Terms like “supply side subsidies” and “direct price controls” are not particularly common in the day to day management of early learning services but could play a very material role in how services are funded, and priced, if a broader reset in regulatory policy settings occur in the next few years.
This article aims to unpack what is meant by these terms in an ECEC context, provide some examples of how they are being employed in other countries around the world and conclude what the likelihood is that we see their adoption in Australia.
What are supply side subsidies and direct price controls?
Supply side subsidies and direct price controls are tools that the Government might use to manage the pricing of a good or service that is being delivered to an end market.
In the context of ECEC direct price controls would in some way limit the price that approved providers can charge parents and the supply side subsidy is the funding provided directly to the provider that compensates them for the loss of revenue the direct price control has created.
Why is the ACCC talking about these things now?
The ACCC was tasked by the Albanese Government soon after the last General Election to hold an inquiry into the market for the supply of child care services.
We are now starting to see some of the findings of that inquiry and a central component to those findings was the observation that current policy settings are not acting as an effective tool to anchor prices, and are likely to become less effective as time goes on.
In light of that the ACCC has recommended consideration be given to other ways to address the “forever rising prices” problem in ECEC of which supply side subsidies and direct price controls are options.
How does the subsidy system in Australia currently work?
The child care subsidy (CCS) system is a demand side subsidy with indirect price controls.
That means government support is provided to those demanding the service, ie: parents/carers/families) not those supplying the service, ie: providers and that providers are still able to set their own prices BUT embedded in the system are mechanisms that in theory, are meant to dis-incentivise over exuberant price rises.
The main mechanism embedded in the CCS is the hourly rate cap, which was designed as a resisting factor for excess fee increases because families would shoulder the full cost of any fee increase above the cap.
Why has the ACCC called CCSout and suggested considering other systems?
The main reason is that the ACCC has recognised that the structure of the ECEC system in Australia, and the current regulatory set up, does not lend itself to anchoring fee increases (and by extension affordability as measured by price will persist as a challenge for families and the Government to manage.) It is against this backdrop that the ACCC recommended examining alternative systems that may help achieve better results on the affordability side of things via alternative policy set ups.
How do other countries tackle ECEC affordability?
There are a range of different applications of direct price controls and supplier side subsidies currently being implemented or in the process of being implemented around the world.
Canada
Policy: Parents pay $10 fee per day for ECEC regardless of income and location by 2026
Through the program, parents of children enrolled in a qualifying ECEC facility are eligible for a partial and graduated reduction in fees. Parents whose children attend a participating facility currently receive a credit or rebate on their fees, and the government plans to continue reducing fees until an average of $10 per day is achieved in 2026.
Comment - This policy, when fully implemented, is a classic example of direct price controls in that ECEC providers have to commit to only charging families $10 for the service. The Government will then compensate providers directly via the “supply side” subsidy for the difference between the actual price (market price) and reduced price ($10 a day). This amount is calculated centrally by the Government and includes compensation for costs plus a bit extra allowing providers to make a surplus.
Ireland
Policy - Childcare fees frozen indefinitely at 2021 levels
Comment - The Irish have taken a slightly different approach by allowing providers to retain the fee levels they were charging in 2021 but not allowing them to raise them any further. Families that were paying €45 a day (approx. AU$75) in 2021 are still paying €45 in 2023.
In order to compensate providers top up payments, calculated by the Government, are paid directly to providers on a per enrolled child basis. Ireland also has a demand driven subsidy, like the CCS, that remains in place, so parents not only get subsidised hours of care but also get the benefit of the price of that care not going up.
United Kingdom
Policy - 15 hours rising to 30 hours of free ECEC must be extended to eligible families
Comment - In the UK the approach is slightly different. The Department of Education mandates all services to offer a set amount of hours to each family at no cost. Providers are reimbursed for these free hours by a supply side subsidy that is calculated by a centrally operated funding formula. Families that use more than the free block of hours in a given period can also get support from a direct to family tax free childcare payment with lower socioeconomic families getting additional help.
Do these systems actually work? Will they solve the affordability dilemma?
This is a very difficult question to answer.
As the ACCC observed there does seem to be a shift towards more and more countries moving towards direct price control and supply side subsidy systems but given that these transitions in the ECEC space are all quite recent there is no data set that proves they work, or not.
It is just too early.
What we do know however, is that there is an increasing appetite on the behalf of policy makers to explore new ways to regulate and subsidise what is now perceived to be an essential part of a nation’s educational, social and financial fabric - ECEC.
Are we likely to see policies like these in Australia one day, and if so when?
Yes, very possibly.
The Albanese Government has been clear about its views on the current CCS system. It is simply not compatible with their affordability and accessibility vision and therefore is ripe for some sort of redesign.
This is part of the reason why the Productivity Commission was asked to review the Australian ECEC system and also why it’s interim report and the associated Recommendations due out next year will be so closely watched.
In terms of implementation, the policy shift, if it was to happen, would most likely be implemented at some point in the next term on the assumption that Labor retain Government in the next Federal election, so late 2025/2026.
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