Why Universal Free Childcare is Possible

This is a thing that has dropped off radar. How quickly the public discourse moves. On Thursday 2 April, 2021 The Australian Government announced (temporary) free childcare for the covid pandemic.

It is no secret the spending of governments lifted by hundreds of billions of dollars and yet no extra taxes were raised and our central bank, the Reserve Bank began purchasing treasury securities (bonds). Effectively what we call government debt is now owned by the RBA instead of private financial interest. I’ve written about spending operations and money here, here, here and here. I make no secret that this understanding derives from Modern Monetary Theory which is a lens that allows you to understand the way our monetary system operates and requires you to implement a values system on top of that understanding.

How did the government provide the funding to make childcare free?

There are some technical arrangements in how the Federal Government funded the temporary free childcare.

First we need to make a distinction between types of appropriation bills. We have annual appropriations or special appropriations. The annual appropriations provided funding for specific purposes and are bills presented in the budget papers (usually in May each year) Special appropriations are funding mechanism within acts to provide funding for specific things. Usually using a spending on a rule principle rather than having a specified amount (e.g unemployment benefits – if you meet the criteria set out in the legislation you are eligible to receive payment) You can read more about the detail here

The Parliament of Australia (source) reported that

“Until 6 April 2020, the Australian Government provided both child care fee assistance to families and direct assistance to services. Most of the assistance was delivered through a fee assistance payment: the Child Care Subsidy (CCS). 

The CCS was means tested with rates of payment based on family income, hours of care used, type of care used, and parents’/carers’ level of work, training or study. Families received a percentage of the fees charged or the hourly fee cap (an amount set by the government)—whichever was lower. The percentage received was determined by the family’s income and the hours subsidised determined by the parents’/carers’ level of work, training or study. 

The payment was paid directly to providers to be delivered to families in the form of a fee reduction”

The Australian Government then passed the Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020. The Parliament of Australia reported (source)

Under the new funding arrangements, the CCS system is suspended and child care services will receive a weekly ‘business continuity payment’ equivalent to 50 per cent of fees charged (up to the CCS hourly fee cap) for sessions of care in the fortnight preceding 2 March 2020 (17 February 2020 to 28 February 2020). The payment for vacation care services will be based on the first fortnight of revenue in the school holidays between Term 3 and 4 of 2019. This will mean services can receive a payment worth up to half of their pre-pandemic fee revenue.

The amendment is complex to read without context of the act it amendments but in brief the Child Care Subsidy amendment amends section 205A(1) for the ‘circumstances in which a continuity payment can be made’ and 205A(2) ‘the method to determine a payment amount’ of the New Tax System (Family Assistance) Act 1999.

Childcare services also had access to the JobKeeker payment, an additional stream of funding in the form of a wage subsidy.

“While the new funding arrangements will only cover a portion of child care providers’ previous earnings, other government support may be available, particularly the proposed JobKeeper Payment. The JobKeeper Payment will help to cover eligible child care providers’ wage costs.”

We can see in the Family Assistance Act 1999, there are special appropriations that ‘appropriate’ funding for a specific purpose. The Child Care Subsidy Amendment (Coronavirus Response Measures No. 2) Minister’s Rules 2020 made changes to the rules so instead of paying providers a fee subsidy (reducing the amount parents made) they implemented a ‘business continuity payment’ forgoing the need for user pays charges.

How The Australian Government makes a payment

It is important to note that the appropriation doesn’t allow the funding to be spent. That comes from the Public Governance, Performance and Accountability Act 2013 (which you can trace back to the Audit Act 1901) and section 51;

(1) If an amount is appropriated by the Parliament in relation to a Commonwealth entity, then the Finance Minister may, on behalf of the Commonwealth, make the appropriated amount available to the entity in such instalments, and at such times, as the Finance Minister considers appropriate.
(2)  However, the Finance Minister must make an amount available if:
(a)  a law requires the payment of the amount; and
(b)  the Finance Minister is satisfied that there is an available appropriation.

There is nothing within legislation that states prior funds need to be found. A consolidated revenue fund (CRF) exists as a ‘conceptual’ account under section 81 of the constitution (any ‘money’ held by a government entity is deemed to form part of the CRF)

The Reserve Bank of Australia holds Offical Public Accounts (OPA) with numbers in them but they do not form part of the money supply. You can think of the OPA as a record of what has been taxed and spent. The RBA statistics on monetary aggregates do not count government holdings as part of the money supply. In table D3 the notes state; (source)

The sum of currency and transaction deposits does not add exactly to M1, which is due to a small portion of currency which is estimated to be held by non-residents and/or the government (these sectors are not included in the monetary aggregates). This estimate is based on those sectors’ relative shares of transaction deposits in all transaction deposits


What About Inflation?

The ABS tells us ‘the Consumer Price Index (CPI) is a measure of household inflation and includes statistics about price change for categories of household expenditure’

The graph below shows the inflation rate per quarter from Dec 2011 to Dec 2020. (source)

The ABS data for the reference period ending June 2020 said under it’s key statistics

  • The Consumer Price Index (CPI) fell 1.9% this quarter.
  • Over the twelve months to the June 2020 quarter the CPI fell 0.3%.
  • Most significant price fall was Child care at-95.0%.
  • Most significant price rise was tobacco at +2.7%.

Childcare falls under furnishings, household equipment and services group. A further analysis of that group says

The impact of making childcare free, in terms of not charging user pays fee is what caused the CPI to record a negative result. That period also sustained mass job losses (which had deflationary pressure on wages) – we shouldn’t think of inflation as good or bad. It is more complex than a rise being good or a fall being bad.


Conclusion

Now if we put all this together we can begin to understand the statement ‘taxes don’t fund expenditure’ (the currency issuer spends first) The idea that public provisioning is a ‘cost‘ then is erroneous. The government needs no prior funds before it spends. Free childcare benefited thousands of Australians. It was made possible by a legislative change in how funding was determined and paid out.

We can question the composition of childcare services by which I mean who owns the centres – we can look at the low pay in childcare services and the why these services should be run for profit. I would determine that it is best to run childcare services as a public good and attach a service to every primary school in the country. You would then hire workers in low paid private for profit centres and lift pay.

Once you break the myth that governments need to find tax dollars – a retort is usually ‘printing money’ is inflationary. Take a deep breath and appreciate that printing money doesn’t apply to any spending operation. You can see above that the government spends in the same way irrespective of revenue or bond issuance.

It is better to think of inflation as a conflict. As firms hike their prices – workers look to increase wages – something has to ameliorate that conflict. Nationalisation of industries are part of ending that conflict. It removes a financial cost from the individual and it marshals real resources (in this case labour) for a public benefit – the provisioning of childcare.

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