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6401.0 - Consumer Price Index, Australia, Sep 2008 Quality Declaration 
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 22/10/2008   
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APPENDIX CHILD CARE SERVICES IN THE CPI


TREATMENT OF CHILD CARE SERVICES IN THE AUSTRALIAN CONSUMER PRICE INDEX


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 also sets out the change in treatment of the Child Care Tax Rebate (CCTR) that took affect in the CPI from the September quarter 2007 and subsequent changes to the Child Care Benefit (CCB) and CCTR from the September quarter 2008.

2. The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising all the types of items bought by Australian households. The composition of the CPI basket is based largely on information on the spending habits of Australian households during 2003-04, obtained from the Household Expenditure Survey (HES) conducted by the Australian Bureau of Statistics (ABS). While the HES did not identify the cost of child care as being a large expense overall for the general population (0.45% of the average weekly household expenditure in June quarter 2005), for families with young children it is a much more significant expense. This article outlines the methodology for pricing child care in the CPI.

3. For the purposes of the CPI, expenditure on child care relates to fees charged by registered or CCB approved child care centres and crèches, baby-sitting charges, and play group charges. In practice, fees paid to private and community child care centres, pre-schools, and to family day-care providers are priced in the CPI.


MEASURES TO ASSIST FAMILIES

4. Before describing the methodology for measuring child care in the CPI, it is necessary to understand the two mechanisms that the government has put in place to assist families with the cost of child care, i.e. the CCB and the CCTR.


Child Care Benefit (CCB)

5. CCB is administered by the Department of Education, Employment and Workplace Relations (DEEWR) and delivered by the Families Assistance Office (FAO). It is a payment to assist families with children in registered and approved child care, with benefit rates depending on the individual circumstances of each family (number of children in care, number of hours each is in care, family income, and the type of child care). The maximum rate of CCB (currently $173.50 per week for one child in 50 hours of CCB-approved care) is available to families with incomes up to a threshold of $36,573 a year. Once a family's income exceeds this threshold, the amount of CCB tapers as income increases. The income cut-off point for a family with one child is a combined income of $126,793, after which they are not eligible for the CCB. Children using part time care attract a slightly higher rate of CCB per hour than those using full time care.


Child Care Tax Rebate (CCTR)

6. The Federal Government announced that it would introduce a 30% CCTR for out-of-pocket child care costs from 2004/05. Working, studying or training parents with children in approved child care were entitled to a tax offset of 30% of the difference between the child care fees incurred and the CCB, up to a limit that is indexed annually. From 1 July 2008, the government raised the CCTR to 50% and increased the maximum rebate that can be claimed to $7,500 per annum. The formula to calculate the CCTR is as follows:

CCTR = (Gross Child Care Fees - CCB) x 50%

7. When the system began in 2004/05, the CCTR could only be claimed in the tax return of the following year and could only reduce a tax liability to nil (any excess could not be refunded).

8. In May 2007, the government announced that CCTR would be administered differently. The CCTR ceased to be a tax offset and instead would be paid directly to families as a rebate by the FAO as soon as possible after the end of the financial year in which the child care costs were incurred, regardless of the family's tax liability. However the CCTR is now available to be paid quarterly into an individual's bank account.

9. As explained below, this change to the CCTR brings it in scope of the CPI and it is included in the CPI calculation from the September 2007 quarter onwards.


CPI METHODOLOGY

10. There are three alternative conceptual approaches for constructing a CPI. A detailed description of them is set out in Australian Consumer Price Index: Concepts, Sources and Methods 2005 (ABS cat. no. 6461.0). The principal purpose of the Australian CPI is to provide a general measure of price inflation for the household sector as a whole. This is best achieved by constructing what is referred to as an "acquisitions index". The key attribute of such an index is that it measures the average change between two periods in the prices on an out-of-pocket expenses basis for the consumption of goods and services actually acquired by households. Prices measured on this basis include any government taxes and charges and are net of subsidies and rebates that reduce out-of-pocket expenses. In terms of the time of recording, the International Manual on CPIs, Consumer Price Index Manual: Theory and Practice (International Labour Organization, 2004,) para 3.19 defines the time of acquisition as follows:

"The time at which a good is acquired is the moment at which ownership of the good is transferred to the consumer. In a market situation, it is the moment at which the consumer incurs a liability to pay, either in cash or in kind. The time at which a service is acquired is not so easy to determine precisely as the provision of a service does not involve any exchange of ownership. Instead, it typically leads to some improvement in the condition of the consumer. A service is acquired by the consumer at the same time that the producer provides it and the consumer accepts a liability to pay."


Measuring the Price Changes in Child Care for the CPI

11. Consistent with the acquisitions approach, child care in the CPI is measured as child care fees minus any subsidies/rebates that are available to families purchasing child care services.


Benefits, Subsidies and Rebates in the CPI

12. The criteria (taken from the Australian Consumer Price Index: Concepts, Sources and Methods (ABS cat. no. 6461.0)) that are considered by the ABS when determining whether specific benefits, subsidies and rebates (referred to below as "benefits") should be deducted from the prices collected in calculating the CPI are listed below. "Taxpayer", where noted below, refers to households that are paying income tax.

13. Benefits are included if :

  • The benefit is tied to the acquisition of a specific good or service (or the right to acquire a specific good or service) AND
  • The benefit is not an integral component of the income tax system and is available to non-taxpayers as well as taxpayers. In practice, this generally means the benefit provided to taxpayers by way of a tax rebate is also available to non-taxpayers via cash or other form of benefit.

14. These two criteria both have to be met for a rebate/subsidy to be included when compiling the CPI. The original CCTR legislation fell under a "Tax Laws Amendment (2005 Measures No. 4) Bill 2005". Under that legislation the CCTR was a non-refundable tax offset and it was available only to taxpayers. As a result, the ABS concluded that the rebate in its original form did not satisfy the second of the above criteria; in effect, it was an integral part of the tax system and was therefore outside the scope of the CPI.

15. The change to the administration of the CCTR payment, for child care costs incurred from 1 July 2006, meant it no longer depends on a family's tax liability and now satisfies both criteria. Therefore it is in scope of the CPI.

16. Benefits available under the CCB have been deducted from the actual child care prices (the gross prices) in measuring the cost recorded in the CPI from the September quarter 2000.


NET CHILD CARE FEE CALCULATION

17. The out-of-pocket costs of child care will vary depending on the actual (gross) price paid by a family and the value of the family's CCB and CCTR entitlements (i.e. Net Child Care Fees = Gross Child Care Fees - Child Care Benefit - Child Care Tax Rebate). It is impossible to collect such details for every family purchasing child care services. Therefore, the ABS randomly samples confidentialised family profiles that reflect the spread of attributes (such as income, number of children and hours in care for each child) throughout the population of families that receive CCB and CCTR.

18. Gross fees are collected from a sample of the child care providers in each capital city. The sample of family profiles are then used to calculate a net fee taking into account gross fees paid, CCB and CCTR entitlements and the profile of child care usage.

19. DEEWR apply new CCB rates and CCTR limits from 1 July each year and the ABS methodology is adjusted annually to reflect any changes.

20. 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 (ABS cat. no. 6345.0). The aim of using a four-quarter moving average of the wage price index is to reflect the impact of changes in wages on the annual incomes underlying the "fixed basket" of child care services.


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 $173.50 per week for one child in full-time care. Families earning $65,000 per year are entitled to 68.49% of the maximum child care benefit. The CCTR 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
$118.83 per week
$113.83 per week
Eligible child care tax rebate
$60.58 per week
$63.08 per week
Net child care fee
$60.58 per week
$63.08 per week
(% change)
4.1

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
$118.83 per week
$118.83 per week
Eligible child care tax rebate
$60.58 per week
$65.58 per week
Net child care
$60.58 per week
$65.58 per week
(% change)
8.3

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
$118.83 per week
$113.83 per week
Eligible child care tax rebate
$60.58 per week
$68.08 per week
Net child care
$60.58 per week
$68.08 per week
(% change)
12.4



GROSS VERSUS NET PRICES

22. The table below compares the price indexes for gross and net child care fees over the period September quarter 2005 to September quarter 2008. 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 CCTR 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 CCTR from 30% to 50%.

24. With the exception of September quarter 2007 and September quarter 2008, over time it can be seen that 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 CCTR does take up some of this gap.

25. In other words, the out-of-pocket expenses (prices after CCB and CCTR 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
Index number(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

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


26. The quarterly gross child care fee index will be made available annually on request after the release of the September quarter CPI.


FURTHER INFORMATION

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


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