The fourth day is where the arithmetic stops working. Picture a payroll officer in an outer-Brisbane suburb, back from parental leave, working three days a week with a two-year-old in long day care. Her employer offers her a fourth day. She sits down with the invoice and a calculator, because she has learned not to trust the intuition that more work means more money. The extra day adds gross pay. Against it sits income tax on that pay, a day of childcare fees at the going rate for her centre, and the fact that the higher household income nudges her family further down the subsidy taper, so the government pays a slightly smaller share of every hour of care — not just the new day, but all of them. By the time she has finished, the fourth day is worth a fraction of what the payslip says. Sometimes it is worth almost nothing.
The couple in this illustration are invented and the numbers on their kitchen table are theirs alone. The pattern is not invented. Analysis of second-earner incentives in the Australian tax and transfer system has repeatedly found workforce disincentive rates — the share of extra earnings lost to tax, withdrawn payments and childcare costs combined — running in the order of 80 to 100 per cent or higher on the fourth and fifth days of work for some second earners, overwhelmingly mothers (approx.; Grattan Institute analysis, 2020–2022, clearly-labelled secondary source; Productivity Commission, inquiry into early childhood education and care, 2024). It is one of the highest effective tax rates anywhere in the Australian system, and it is levied on the decision to work more.
Four hundred kilometres inland, a different family faces a problem that no calculator solves. There is one long day care service in their town. It has a waiting list measured in months for the under-two room, because the under-two room requires one educator for every four children and the service cannot find the educator. The family is not weighing a fee against a wage. They are being told that the place does not exist at any price. A subsidy that pays 90 per cent of a fee is worth exactly nothing to them, because there is no fee to pay 90 per cent of.
Those two families are the whole story of this topic. One of them is the family the Cheaper Child Care reforms were designed for, and for whom they measurably worked. The other is the family for whom a demand-side subsidy — money given to buyers rather than capacity given to sellers — can do almost nothing at all. Both facts are true at once, and an honest audit has to hold them together.
What the government did
The architecture the current government inherited dates from July 2018, when the Turnbull government replaced the old Child Care Benefit and Child Care Rebate with a single payment, the Child Care Subsidy (CCS), under the family assistance law. The CCS pays a percentage of an hourly fee, up to a legislated hourly rate cap that varies by care type. The percentage falls as family income rises, and the number of subsidised hours was, until recently, governed by an "activity test" that tied entitlement to how much paid work, study, training or volunteering the parents did. That basic design — a per-hour percentage subsidy, capped, income-tested and activity-tested — is the inherited structure, and every change since has been a change to its dials rather than to its shape.
The 2022 Act and what it changed
The Family Assistance Legislation Amendment (Cheaper Child Care) Act 2022 passed the Parliament in November 2022 and took effect from 10 July 2023. It did three main things.
First, it lifted the maximum subsidy rate from 85 per cent to 90 per cent for families with a combined income up to $80,000. Second, it flattened and extended the taper: above $80,000, the subsidy rate falls by one percentage point for each additional $5,000 of family income, reaching zero at a family income of $530,000. Before the change, the rate fell away faster and cut out lower. Third, it retained the higher subsidy for second and subsequent children aged five and under that had been legislated by the previous government in 2021, and it guaranteed a base entitlement of 36 hours a fortnight of subsidised care for Aboriginal and Torres Strait Islander children regardless of the activity test. The Department of Education estimated at the time that around 1.2 million families would receive a larger subsidy (approx.; Department of Education, 2023).
The same government did something less common and worth noting up front: it asked to be measured. In early 2023 the Treasurer directed the Australian Competition and Consumer Commission to conduct a formal price inquiry into the supply of childcare services. The ACCC published interim reports in June and September 2023 and a final report in December 2023. Separately, the government commissioned the Productivity Commission to conduct a full inquiry into early childhood education and care, which reported to government in 2024. Both of those bodies are independent, both published in full, and much of the evidence in this article comes from what they found. A government that expected the answer to be flattering does not usually commission two of them.
What came after: the activity test, and paying the educators
Two further changes matter for the argument below.
In August 2024 the Commonwealth announced it would fund a wage increase of 15 per cent for early childhood education and care workers over two years — 10 per cent from December 2024 and a further 5 per cent from December 2025 — at a cost in the order of $3.6 billion (approx.; Australian Government announcement, August 2024). The money was delivered as a grant to providers, the Worker Retention Payment, and it came with a condition: to receive it, a provider had to cap its fee increases, initially at 4.4 per cent over the twelve months from August 2024 (Department of Education, Worker Retention Payment grant conditions, 2024). That is an unusually direct acknowledgement by the Commonwealth that money put into the sector can end up in fees, and a deliberate attempt to stop it happening.
Then, in 2025, the Parliament passed legislation replacing the activity test with a guaranteed minimum entitlement — three days, or 72 hours a fortnight, of subsidised care for every eligible family up to a family income threshold in the order of $530,000 (approx.), commencing from January 2026. This is the single largest structural change to the CCS since 2018. It removes a test that had reduced entitlements for families with irregular or low work attachment, which in practice meant many of the children with the most to gain from early education got the fewest subsidised hours.
Alongside these, the Fair Work Commission's gender-based undervaluation review of priority awards concluded in 2025 that work in a number of historically feminised sectors, including children's services, had been systematically undervalued, and awarded phased wage increases (Fair Work Commission, gender-based undervaluation priority awards review, 2025 decisions). That is a decision of an independent tribunal, not of the government, and it is one of the reasons provider costs are still rising. It is also, on the evidence the Commission examined, correct.
The strongest case for the policy
Out-of-pocket costs really did fall, and the return is not only a household saving
Start with the fact that the critics of this policy most often skip: it worked, on its own terms, and the regulator that examined it says so. Following the July 2023 subsidy increase, the ACCC found that average out-of-pocket costs fell across every care type it measured — approximately 11 per cent for centre-based day care, 8.8 per cent for outside school hours care, 12 per cent for in-home care and 13.8 per cent for family day care (ACCC, Childcare Inquiry Final Report, December 2023). An 11 per cent fall in the net weekly cost of the largest care type, for more than a million families, is not a rounding error or a presentational trick. It is a large, real, measured reduction in a major household bill, and it happened within weeks of the legislation commencing.
Second, the participation argument is a genuine economic return, not a talking point. Australia taxes second earners — overwhelmingly women returning to work after having children — at some of the highest effective rates in the developed world once childcare fees and withdrawn subsidy are counted alongside income tax. A second earner contemplating a fourth day can lose most of the value of that day. Reducing the fee side of that equation directly reduces one of the sharpest work disincentives in the system. The gains compound: hours worked now determine wage growth, superannuation balances and career trajectory for decades afterwards, which is a substantial part of why the retirement savings gap between men and women persists. A policy that raises participation is not spending in the ordinary sense; it enlarges the tax base that pays for it.
Third, the wage increase for educators is a cost the country should be willing to bear. Early childhood educators have been paid, for decades, at rates far below the skill, responsibility and regulatory obligation the work carries. An independent tribunal has now found that undervaluation was systematic and gendered. If fees rise partly because the people who care for and teach two-year-olds are finally being paid something closer to the value of that work, that is not a policy failure. It is a policy choice with a visible price, and the alternative — continuing to hold fees down by underpaying a largely female workforce — is not a defensible position for anyone to hold.
Fourth, this is education, not just child-minding. The evidence that quality early childhood education improves language, cognitive and social outcomes is among the more robust findings in the field, and the effect is consistently largest for children from disadvantaged backgrounds — precisely the children whose families were most constrained by the old activity test. Judged as human capital investment rather than household relief, the return is measured over a working lifetime, not a budget cycle.
Finally, and decisively for the simplest version of the attack: the ACCC found limited evidence of profiteering by private operators. The inquiry examined provider margins and pricing behaviour and did not find that the sector had simply pocketed the subsidy. Anyone who wants to argue that childcare operators grabbed the taxpayer's money has to argue with the competition regulator's own finding, and they will lose.
The evidence: two numbers that move in opposite directions
The central difficulty in this topic is that "the cost of childcare" refers to two different numbers, and public debate constantly confuses them. One is the fee — the price the service charges per hour or per day. The other is the out-of-pocket cost — what the family actually pays after the Child Care Subsidy is applied. The government controls the second directly and the first not at all. Between 2023 and today, those two numbers have moved in opposite directions, and everything about this policy follows from that.
The fee line, before the current government arrived
The starting fact is the one that establishes the problem, and it is important to be precise about who owned the period. Australian childcare fees rose 22.8 per cent between 2018 and 2022, against an adjusted OECD average of 6.2 per cent over the same period (ACCC, Childcare Inquiry Final Report, December 2023). Australian fee growth over those four years was therefore roughly three and a half times the comparable international average.
That period runs from the introduction of the CCS in July 2018 to the end of 2022. Almost all of it sits under the previous government. This is an inherited problem, not a created one, and the ACCC's framing makes clear it was a problem of long standing rather than a sudden break. The current government did not cause the 22.8 per cent. What it owns is what it did about it, and what has happened to fees since.
The out-of-pocket line, after July 2023
The Cheaper Child Care changes did what they were designed to do, immediately and measurably. The ACCC found average out-of-pocket costs fell by approximately 11 per cent for centre-based day care, 8.8 per cent for outside school hours care, 12 per cent for in-home care and 13.8 per cent for family day care (ACCC, Final Report, December 2023). The Australian Bureau of Statistics recorded the same event in the Consumer Price Index: the childcare series fell sharply in the September quarter of 2023, in the order of 13 per cent (approx.; ABS, Consumer Price Index, Sep-2023 quarter).
That CPI series deserves a sentence of explanation, because it is one of the most misread numbers in Australian economic statistics. The ABS childcare component of the CPI measures the out-of-pocket price paid by households, net of the Child Care Subsidy. It therefore falls whenever the subsidy rises, regardless of what the underlying fee is doing. A headline reading "childcare prices fell 13 per cent" is accurate and is also not a statement about fees. It is a statement about the size of the government's contribution. Anyone using the childcare CPI to argue that childcare got cheaper to produce has misunderstood what the series counts.
The finding that does the analytical work
The ACCC's own summary of what happened next is the hinge of this entire article, and it is worth reading slowly. The regulator found that affordability improved immediately in July 2023 following the subsidy increase, "although these savings were soon eroded by further increases in the costs of providing childcare services" (ACCC, Childcare Inquiry Final Report, December 2023).
Read that sentence again with attention to what it does not say. It does not say providers exploited the subsidy. It does not say the money was captured by shareholders. It says the costs of providing the service rose, and those rising costs pushed fees up, and rising fees ate into the saving that families had just received. The mechanism is not misconduct. It is arithmetic.
The ACCC reached its overall conclusion in similarly plain terms: childcare markets under current regulatory settings are not meeting the key policy objectives of accessibility and affordability, with substantial variation between local markets. That is the competition regulator, commissioned by the government of the day, reporting that the market as configured does not deliver what the policy is for.
The subsidy did not fail because anyone behaved badly. It was absorbed because a bigger cheque met a supply that could not grow to meet it.
Where the cost pressure actually comes from
If the erosion is driven by provider costs, the honest question is what those costs are. The ACCC examined them, and the answer is unglamorous and largely legitimate.
Labour dominates. Wages and on-costs make up the great majority of a centre's operating expenditure — in the order of two-thirds to 70 per cent for centre-based day care (approx.; ACCC, Childcare Inquiry Final Report, December 2023). This is not a business where labour can be engineered away, because the labour is the service and the amount of it is set by law. Under the Education and Care Services National Regulations, services must maintain minimum educator-to-child ratios: one educator for every four children aged under 24 months, and one for every eleven children aged over 36 months, with the ratio for two-to-three-year-olds varying between states and territories. Those ratios, and the qualification requirements that sit alongside them under the National Quality Framework, were introduced through the reforms agreed by the Council of Australian Governments and phased in from 2012. They are inherited by every government since, they are the main reason Australian early childhood care is of comparatively high quality, and they mean that a centre cannot respond to higher wages by supervising more children with fewer adults. The cost passes through.
On top of that sits the deliberate, Commonwealth-funded 15 per cent wage increase for educators from December 2024, and the Fair Work Commission's 2025 gender-undervaluation decisions. Both raise the cost of delivering an hour of care. Both are, in this publication's assessment, justified. A workforce that has been underpaid for a generation relative to the skill the work requires is being paid more, and there is no version of that which is free.
The non-labour costs are real too and less discussed: commercial rent on premises that must meet purpose-built regulatory standards for space, outdoor area, sanitation and safety; insurance, which has risen across the whole care economy; food; utilities; and compliance with the National Quality Standard. None of these are within a provider's discretion to abandon.
This is why the profiteering accusation fails on the evidence, and why it should not be made. The ACCC looked and found limited evidence of it. The costs that eroded the saving are the costs of running a regulated, staff-intensive service in a period of general inflation and a deliberate, warranted correction to sector wages. A critique that ignores this is not merely unfair to operators — it is analytically wrong, and it points at the wrong reform.
Thin markets: the supply problem the subsidy cannot reach
The second half of the evidence is about geography, and it is where the policy's limits are starkest.
The ACCC found substantial variation between local childcare markets — availability, price and choice differ enormously depending on where a family lives. Independent mapping of supply has found that a very large share of Australians live in areas best described as "childcare deserts", defined as places with more than three children for every available place; the most widely cited estimate puts that at roughly one in three Australians (approx.; Victoria University Mitchell Institute, Deserts and Oases, 2022, clearly-labelled secondary source). The shortage is concentrated in regional and remote areas and in some outer-suburban and lower-income communities.
The problem is that these are precisely the places where the benefit of early childhood education is greatest. The developmental gains from quality early learning are largest for disadvantaged children. The participation gains are largest where household incomes are lowest and a second income matters most. And the supply is thinnest exactly there.
The reason is not mysterious. A childcare service is a fixed-cost business with a legally mandated minimum staffing level. It needs a certain density of children within a certain travel radius to cover its costs. In a town of 3,000 people, the numbers may simply not work, and a demand-side subsidy does not change the arithmetic of a business case — it raises what families can pay, but it cannot conjure a viable service where the population base will not support one, and it certainly cannot conjure a qualified educator willing to move there.
Which brings us to the binding constraint. Places require educators. Early childhood teachers and child care workers have appeared on the national skills shortage lists in successive years (Jobs and Skills Australia, Skills Priority List, 2022–2025 editions). You cannot open a room without staffing it to the legal ratio, and services across the country have rooms they cannot open. This is the reason the supply side does not respond quickly to a larger subsidy even in cities: the limiting factor is not capital or even willingness, it is qualified people. Wage increases are the correct long-run response to a workforce shortage, which is a further reason the educator pay rise was the right call — but training and attracting a workforce takes years, and the subsidy increase took effect in a single fortnight.
The critique: what a demand-side subsidy does when supply cannot move
Set the pieces beside each other and the conclusion assembles itself without anyone needing to be accused of anything.
The government increased the amount it pays per hour of care. It did not, and largely could not, increase the number of hours of care available. Supply is constrained by three things the subsidy does not touch: the number of qualified educators, the legally required staffing ratios, and the economics of operating a fixed-cost service in a low-density area. When you increase what buyers can pay in a market where the quantity supplied cannot expand to match, some of that increase shows up as higher prices rather than as more consumption. This is not a controversial proposition and it does not require anyone to behave badly. It is the standard result, and it is what the ACCC's erosion finding describes in the sector's own cost language.
The distinction that matters is between absorption and appropriation. Appropriation would mean operators taking the subsidy as margin. The ACCC looked for that and found limited evidence of it. Absorption means the subsidy raising the ceiling on what the market can bear, so that legitimate cost increases — award wages, rent, insurance, compliance — pass through into fees more readily than they otherwise would, because families can now afford to absorb them. The subsidy does not cause the cost increases. It makes them easier to pass on. That is a subtler claim than gouging, and it is a much harder one to refute.
The missing price signal
There is a second mechanism, and the ACCC identified it. Childcare does not behave like an ordinary competitive market from the demand side either. Parents do not choose a service the way they choose a phone plan. They choose on location — usually within a few kilometres of home or work or on the route between them — on whether a place is available at all, on the quality rating, and on whether they trust the people in the room with their child. Price ranks well below those. The ACCC found that this pattern of choice weakens the competitive discipline that would otherwise hold fees down.
Now add the subsidy design. Because the CCS pays a percentage of the fee up to an hourly rate cap, a family below the cap sees only a fraction of any fee increase. If the subsidy rate is 80 per cent, a dollar of extra fee costs the family twenty cents. Families with low price sensitivity, facing a fee where they bear a small share of any rise, in a market chosen on proximity and availability rather than price — that is a configuration in which upward pressure on fees meets very little resistance. The hourly rate cap is the one brake in the design, and it works only for services priced at or above it.
A larger public contribution to a market that cannot add supply raises the ceiling on prices before it lowers the cost to families.
The subsidy delivers least where it is needed most
The third strand of the critique is distributional, and it is the one that should trouble the policy's supporters most.
A percentage subsidy on a fee is worth something only if there is a fee to pay. For the family in the regional town with no vacancy, a rise from 85 to 90 per cent is worth precisely nothing. For families in outer-suburban growth corridors on long waiting lists, it is worth whatever fraction of a year they eventually get a place for. The subsidy is a transfer that flows to people who have already secured access, and access is unevenly distributed in a way that correlates with income and location. The ACCC's finding of substantial variation between local markets is the polite statistical form of that observation.
The removal of the activity test from January 2026 is a genuine and important correction to one part of this — it directly helps the families whose irregular or absent work attachment previously cut their subsidised hours, which disproportionately meant low-income and First Nations families. But it is still a change to entitlement, not to supply. It gives more families a right to subsidised hours in a system that already cannot produce enough hours. Where supply is the binding constraint, expanding entitlement without expanding capacity increases competition for the same scarce places. That may be the right thing to do on equity grounds and still make the queue longer.
The fiscal shape of the problem
The Child Care Subsidy now costs the Commonwealth in the order of $14 billion a year (approx.; Budget Paper No. 1, expenses by function), and the published forward estimates have it rising, driven by the higher subsidy rates, the removal of the activity test and continued fee growth. That is a defensible amount of money to spend on early childhood education. The difficulty is the dynamic, not the level.
A percentage subsidy on a rising fee base grows automatically as fees grow. If fees rise faster than general inflation — and the ACCC's evidence is that they have done so persistently since 2018 — then the Commonwealth's bill grows faster than the economy without any decision being made. Meanwhile, if part of each subsidy increase is absorbed into fees, affordability does not durably improve, which generates political pressure for the next subsidy increase. That is a ratchet: the fiscal cost climbs, the affordability problem does not close, and each round of relief creates the conditions for the next one. Nothing about this requires bad faith from any participant. It is what the design does.
It is worth being careful about how strong a claim the evidence supports here. The ACCC established the erosion; it did not publish an estimate of what share of the July 2023 subsidy increase was ultimately absorbed into fees, and this article does not put a number on it. The honest statement is directional: out-of-pocket costs fell, the saving was eroded by rising provider costs, and the underlying fee trend has run above general inflation for years. Anyone claiming a precise pass-through percentage is claiming more than the published record supports.
What they got right, and the honest caveats
Three things belong squarely on the government's side of the ledger, and they should be said plainly rather than buried.
First, out-of-pocket costs fell, and they fell across every care type the regulator measured — approximately 11 per cent for centre-based day care, 8.8 per cent for outside school hours care, 12 per cent for in-home care and 13.8 per cent for family day care (ACCC, December 2023). Those are the numbers an independent regulator produced, not the numbers a minister announced. For a family paying, say, $700 a fortnight out of pocket for long day care, an 11 per cent reduction is roughly $77 a fortnight, or in the order of $2,000 a year (illustrative calculation on the ACCC's average reduction). That is a real improvement in a real household budget, and it arrived on time.
Second, the participation and developmental benefits are genuine and evidenced. Lowering the fee side of the second-earner calculation attacks one of the most damaging distortions in the Australian tax and transfer system, and the removal of the activity test from January 2026 extends early education to children whose families were previously screened out by a test that had little to do with the child's needs. Judged as an investment in human capital, this is money spent on the part of the life cycle where the evidence of return is strongest.
Third, and this deserves more credit than it usually receives: the government commissioned the ACCC inquiry itself, and the Productivity Commission inquiry alongside it. It then published the findings, including the unflattering ones — the erosion, the failure to meet accessibility and affordability objectives, the variation between local markets. That is what a government confident in its policy does, and it is the reason this article can be written from the primary record at all. The Worker Retention Payment's fee-increase cap is further evidence the government understood the absorption risk and tried to address it directly.
The caveats are equally plain. The fee cap attached to the wage grant is a condition on a grant, not a general price regulation; it binds the providers who take the payment, for the period it applies, and it does not address the underlying cost drivers. The activity test change expands entitlement without expanding supply. The 22.8 per cent fee growth of 2018 to 2022 was inherited, but the pattern of above-inflation fee growth has continued on this government's watch — presided over rather than caused, and not yet reversed. And the central finding stands: the ACCC concluded that the market under current settings is not meeting the objectives of accessibility and affordability. That conclusion was published in December 2023, after the reform, and the structural conditions it described have not fundamentally changed.
One more point of fairness. The single biggest cost pressure in the sector right now is a wage increase for educators that this publication regards as overdue and correct. It is possible to say both that the policy has not durably fixed affordability and that one of the main reasons is a decision that was right. Those two statements are not in tension. They are the actual situation.
The risk to the future
A subsidy that ratchets while affordability does not close, and a queue that does not shorten
The forward risk has two parts, and they compound each other. The first is fiscal. A percentage subsidy on a fee base that grows faster than general inflation grows faster than the economy, automatically, without a decision. Add to that a widened entitlement from January 2026 and the ordinary pressure to respond to each new affordability complaint with a higher rate, and the trajectory is a bill that climbs in every forward year while the problem it addresses stays open. Each round of relief that is partly absorbed into fees builds the political case for the next round. That is the definition of a ratchet, and ratchets are difficult to unwind because the unwinding is always felt by families before it is felt by anyone else.
The second is the access gap, and it is the more serious of the two. If the binding constraint on supply is the number of qualified educators and the viability of a service in a low-density community, then no achievable subsidy rate closes the gap in thin markets. A family in a regional town, or in a fast-growing outer suburb where centres are full, does not benefit from a rise from 90 to 95 per cent. The risk is a system that becomes progressively more generous to the families who already have a place and remains structurally unavailable to the families who do not — and since access correlates with income and location, that is a subsidy whose benefit tilts, over time, away from the children the evidence says gain the most from it.
None of this is a forecast. Supply may respond: the wage increases may draw people into the workforce over the next several years, which is exactly what they are meant to do, and the sector may build capacity faster than the pessimistic case assumes. Fee growth may moderate as the current wage transition works through. Those are real possibilities and a fair reading holds them open. But they turn on the supply side responding, and the supply side is the part of this policy that no government has yet solved. The question that decides the next decade is not how large the subsidy becomes. It is whether the country can produce enough educators, in enough places, to make the subsidy mean anything for the families who currently cannot use it at all.