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6401.0 - Consumer Price Index, Australia, Sep 2009 Quality Declaration 
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APPENDIX CHILD CARE SERVICES IN THE CPI


TREATMENT OF CHILD CARE SERVICES IN THE AUSTRALIAN CONSUMER PRICE INDEX (CPI)


INTRODUCTION

1. The purpose of this article is to describe how the costs of child care services are treated in the Australian Consumer Price Index (CPI). It provides an outline of the methodology for pricing child care in the CPI and describes the current and previous treatments of the rebates and subsidies, referred to as child care "benefits", provided by the federal government. This includes the Child Care Rebate (CCR) and Child Care Benefit (CCB).


CHILDCARE IN CPI

2. As part of calculating the CPI, the ABS seeks to measure the rate at which the price of child care changes from quarter to quarter. Child care is one of the items in the set, or "basket", of consumer products that the ABS uses to produce the CPI. The CPI is calculated as a weighted average of the percentage price changes of these items. The composition and weights are determined based on information gathered via the Household Expenditure Survey (HES), a sample survey conducted periodically by the Australian Bureau of Statistics (ABS) to determine the expenditure patterns of private households.

3. Weights are assigned to each item to reflect their relative importance to household consumption in Australia. The 15th series CPI weighting structure, currently in use, was determined according to the 2003-04 HES, and assigns average household expenditure on child care a weighting of 0.45%. This percentage might appear low to some, but it represents the average outlay across all households, not just those with children.

4. Child care is one of many components that go into the production of the CPI, an important and useful measure of the change in consumer prices over time. The CPI measures the price inflation experienced by households and informs the community about changes to the real purchasing power of consumers' incomes. The CPI assists governmental economists in conducting general economic policy, especially monetary policy, and is also widely used for indexation arrangements in both private and public sectors.


METHODOLOGY FOR MEASURING CHILD CARE

5. In regard to timing, consumption of child care is recognised at the time when the child care service is provided, rather than at the time of payment. This is consistent with the "acquisitions" approach and the concept that "a service is acquired at the time that the producer provides it" explained in the para 1.151, Consumer Price Index Manual: Theory and Practice, International Labour Organization, 2004.

6. The price of child care in the CPI is equal to the gross fee payable by the parents, less the amount of subsidies directly related to child care services that they receive. It is measured on an out-of-pocket expenses basis as follows: Net Child Care Fees = Gross Child Care Fees - Child Care Benefit - Child Care Rebate.


BENEFITS, SUBSIDIES AND REBATES IN THE CPI

7. Subsidies directly related to child care services are in scope of the CPI, to ensure a symmetrical treatment with taxes on products. The ABS follows the advice that "subsidies should be taken into account, being treated as negative taxes on products" (para 3.135, Consumer Price Index Manual: Theory and Practice, International Labour Organization, 2004).

8. Following from the acquisitions approach, child care subsidies are in scope of the CPI only where "they are tied to the level of consumption" of child care services (para 5.7, Australian Consumer Price Index: Concepts, Sources and Methods, 2005 (cat. no. 6461.0)).

9. For inclusion in the CPI the ABS also requires that the benefit is not an integral component of the income tax system and is available to non-taxpayers as well as taxpayers. The term "taxpayer" refers to households that are paying income tax.


CHILD CARE SUBSIDIES PROVIDED BY THE FEDERAL GOVERNMENT

10. The federal government subsidises some of the costs of child care. Two such payment types are discussed below, the CCB and the CCR.


CHILD CARE BENEFIT (CCB)

11. CCB is a payment to assist families with children in registered and approved child care, administered by the Department of Education, Employment and Workplace Relations (DEEWR) and delivered by the Families Assistance Office (FAO). Families can claim up to 24 hours of care per child per week, and up to 50 hours if the parent(s) are studying, working or looking for work.

12. As of January 2005 grandparents, who have the primary responsibility for raising a grandchild, can claim up to 50 hours of care per child per week and are eligible to have the full cost of fees covered. This is referred to as the Grandparent Child Care Benefit (GCCB). Eligibility depends upon the grandparent carer receiving an income support payment from Centrelink or Department of Veterans Affairs (DVA).

13. CCB payments depends upon the family's income, the amount of care the family uses, the reason for using care, the number of children in care and the type of care used (approved or registered). As of 1 July 2009 the maximum rate of CCB for one child in full-time approved child care is $180.00 per week. For families using registered care the rates of CCB are significantly lower, limited to $30.10 per week. Payments are based on the family's annual income, and CCB rates reduce on a sliding scale depending on income and the number of children in care. CCB is not available to high income families whose combined income exceeds a certain limit, for example the income limit is $131, 560 for a family with one child in care.

14. The CCB is considered in scope of the CPI, and has been include in the calculation of child care expenses since the September quarter 2000.


CHILD CARE REBATE (CCR)

15. The CCR was introduced by the federal government in 2004-05 to assist working families with the cost of child care. One important distinction between the CCB and the CCR is that the CCR is not means tested. The CCR scheme provides assistance to families using approved child care for work, training or study-related purposes. Families who use registered care are not eligible to receive CCR.

16. In the initial design the government offered to pay 30% of out-of-pocket child care expenses, defined as total child care costs minus any Child Care Benefit received. The CCR was initially delivered as a tax offset and fell outside the scope of the CPI according to criteria set out in Australian Consumer Price Index: Concepts, Sources and Methods (cat. no. 6461.0). The original form of the CCR prevented non-taxpayers from accessing the benefit. Legislation stipulated the CCR was a non-refundable tax offset and could only be claimed in the tax return of the following year (Tax Laws Amendment (2005 Measures No. 4) Bill 2005). The ABS viewed this mechanism as being integral to the income tax system and therefore out of scope.

17. The CCR was brought into scope of the CPI on 1 July 2007 due a change to the administration of CCR which enabled non-taxpayers to access the benefit. The new design meant that the FAO would pay the CCR payment directly into the bank account of eligible families, after the family's tax returns had been lodged but regardless of tax liability. Consequently, the CCR has been included in the calculation of child care expenses from the September quarter 2007. At that stage CCR = (Gross Child Care Fees - CCB) x 30%.

18. On 1 July 2008 the CCR was raised to cover 50% of out-of pocket expenses up to a threshold of $7,500. Now the CPI calculates the CCR as (Gross Child Care Fees - CCB) x 50%. The latest changes mean that CCR payments are now made to eligible families at the end of each quarter, rather than at the end of the financial year. Annual indexing of the threshold has increased the upper limit of CCR claims to $7, 778 per child, per year as of 1 July 2009.


NET CHILD CARE FEE CALCULATION

19. The ABS calculates net child care fees after calculating the two components, gross fees and child care benefits, separately. To produce an estimate of an average household's gross child care fees payable, the ABS collects prices from a sample of child care centres, including family day-care, and private and community child care centres, in each capital city.

20. The ABS models the value of the average household's CCB and CCR entitlements using a random sample of family profiles from the population of families that receive CCB and CCR. These profiles include a range of attributes such as income, number of children and hours in care for each child, that are necessary to generate the estimate. The incomes of the sampled families are indexed quarterly in line with a four-quarter moving average of the wage price index from Labour Price Index, Australia (cat. no. 6345.0). The ABS updates the model annually as new CCB and CCR rates and limits apply from 1 July each year.


EXAMPLE OF HOW NET CHILD CARE RATES ARE CALCULATED IN THE CPI

21. The following examples illustrate how the CPI measures the changes in a family's out-of-pocket expenses when either the child care fees increase and/or the family receives a pay rise. In the examples below the family has a combined annual income of $65,000. The maximum CCB that can be claimed is $180.00 per week for one child in full-time care. Families earning $65,000 per year are entitled to 71.11% of the maximum child care benefit. The CCR is 50% of the difference between the child care fees incurred and the CCB.

Example 1 - The family receives a 4% pay rise

Period 1
Period 2

Combined household income
$65,000 per annum
$67,600 per annum
(% change)
4.0
Gross child care fee
$240.00 per week
$240.00 per week
(% change)
0.0
Eligible child care benefit
$128.00 per week
$123.00 per week
Eligible child care rebate
$56.00 per week
$58.50 per week
Net child care fee
$56.00 per week
$58.50 per week
(% change)
4.5


Example 2 - The child care fees increase by $10 per week

Period 1
Period 2

Combined household income
$65,000 per annum
$65,000 per annum
(% change)
0.0
Gross child care fee
$240.00 per week
$250.00 per week
(% change)
4.2
Eligible child care benifit
$128.00 per week
$128.00 per week
Eligible child care rebate
$56.00 per week
$61.00 per week
Net child care
$56.00 per week
$61.00 per week
(% change)
8.9


Example 3 - The family receives a 4% pay rise and the child care fees increase by $10 per week

Period 1
Period 2

Combined household income
$65,000 per annum
$67,600 per annum
(% change)
4.0
Gross child care fee
$240.00 per week
$250.00 per week
(% change)
4.2
Eligible child care benefit
$128.00 per week
$123.00 per week
Eligible child care rebate
$56.00 per week
$63.50 per week
Net child care
$56.00 per week
$63.50 per week
(% change)
13.4




GROSS VERSUS NET PRICES

22. The table below compares the price indexes for gross and net child care fees over the period from September quarter 2005 to September quarter 2009. It should be noted that the gross index has only been prepared from the September quarter 2005 and has a different reference base from the CPI net child care index.

23. From the table it can be seen that many components impact on this net index. In the September quarter 2007 the net index showed a reduction in "out-of-pocket expenses" with the impact of the inclusion of the CCR as a rebate for the first time and an additional 10% indexation of the CCB rates on top of the usual annual CPI indexation. The net index showed another reduction in September quarter 2008 due to the increase in CCR from 30% to 50%.

24. The net index generally rises more rapidly than the gross prices charged by the child care providers. This is because over recent years, the Labour Price Index has been rising at a faster rate than the CPI and so family incomes are increasing faster than the income thresholds used in calculating CCB. As a result, the subsidy paid under the CCB becomes a smaller proportion of the overall costs of child care. The CCR does take up some of this gap. The exception to this pattern is in September quarter of each year, which is the time that fee increases usually take effect.

25. In other words, the out-of-pocket expenses (prices after CCB and CCR rebates are taken into account) that form the basis of the net prices recorded in the CPI generally rise more rapidly than the gross prices charged by the child care providers.

Child care time series table

NET CHILD CARE
GROSS CHILD CARE (NOT INCLUDED IN CPI)
Index Numbers(a)
Percentage Change from previous quarter
Percentage Change from corresponding quarter of previous year
Index Numbers(b)
Percentage Change from previous quarter
Percentage Change from corresponding quarter of previous year

Sep 2003
169.9
7.3
12.4
na
na
na
Dec 2003
169.9
0.0
10.5
na
na
na
Mar 2004
177.4
4.4
12.7
na
na
na
Jun 2004
179.2
1.0
13.1
na
na
na
Sep 2004
187.4
4.6
10.3
na
na
na
Dec 2004
192.2
2.6
13.1
na
na
na
Mar 2005
198.7
3.4
12.0
na
na
na
Jun 2005
201.5
1.4
12.4
100.0
na
na
Sep 2005
204.4
1.4
9.1
103.2
3.2
na
Dec 2005
211.8
3.6
10.2
104.3
1.0
na
Mar 2006
222.5
5.1
12.0
106.3
1.9
na
Jun 2006
226.5
1.8
12.4
106.8
0.5
6.8
Sep 2006
233.9
3.3
14.4
110.8
3.7
7.3
Dec 2006
238.5
2.0
12.6
111.5
0.6
6.9
Mar 2007
251.3
5.4
12.9
113.9
2.2
7.1
Jun 2007
255.6
1.7
12.8
114.3
0.4
7.0
Sep 2007
170.2
-33.4
-27.2
119.4
4.4
7.8
Dec 2007
172.3
1.2
-27.8
119.9
0.4
7.5
Mar 2008
180.1
4.5
-28.3
122.5
2.2
7.6
Jun 2008
182.3
1.2
-28.7
123.0
0.4
7.7
Sep 2008
140.5
-22.9
-17.5
128.1
4.1
7.3
Dec 2008
142.5
1.4
17.3
128.8
0.5
7.4
Mar 2009
146.8
3.0
18.5
130.7
1.5
6.7
Jun 2009
148.2
1.0
18.7
131.1
0.3
6.5
Sep 2009
149.5
0.9
6.4
134.9
2.9
5.3

na not available
(a) Base 1989 - 90 = 100.0
(b) Base June quarter 2005 = 100.0



FURTHER INFORMATION

26. For further information, please call Lee Taylor on (02) 6252 6251 or email lee.taylor@abs.gov.au.


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