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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).

2. The simplest way of thinking about the CPI is to imagine a basket of good and services comprising all the 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 ABS. While the HES did not identify the cost of child care as being a large expense overall for the general population (0.6% of the average weekly household expenditure), 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 creches, baby-sitting charges, and playgroup charges. In practice, fees paid to private and community child-care centres and to family day-care providers are priced in the CPI.

Methodology

4. 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 (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 of out-of-pocket expenses for the consumption goods and services actually acquired by households. Prices measured on this basis include any government taxes and charges but exclude 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

5. Consistent with the acquisition approach, for child care the CPI seeks to measure child care fees minus any subsidies/rebates that are available to families purchasing child-care services. Currently there are two such subsidies/rebates. They are the Child Care Benefit (CCB) and the Child Care Tax Rebate (CCTR). The key features of each and how they affect the recording of the cost of child care services in the CPI are described below. In summary, benefits available under the CCB are deducted from the actual child care prices (the gross prices) in measuring the cost recorded in the CPI, whereas the rebate available under the CCTR is not taken account of because the rebate is an integral component of the income tax system and income taxes are excluded from the CPI.

The Child-care Benefit (CCB)

6. CCB is administered by the Department of Families, Community Services and Indigenous Affairs (FaCSIA) and delivered by the Family 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 $148 per week for one child in 50 hours of CCB-approved care) is available to families with incomes up to a threshold of $34,310. Once family income exceeds this threshold, the amount of CCB tapers at a varying rate (as income increases) down to a minimum rate, currently $24.85 per child per week for 50 hours of care. All families, regardless of income, are entitled to the minimum rate of CCB. Families with one child in care with an annual income of over $98,348, and families with two children in care with an annual income of over $106,628.40 receive the minimum rate. Children using part time care attract a slightly higher rate of CCB per hour than those using full time care.

7. 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 entitlement. It is impossible to collect such details for every family purchasing child-care services, so the gross fees collected from surveying a sample of the child-care centres are adjusted to a net fee using an income-based model. The ABS samples incomes that proportionally reflect the spread of incomes throughout the population of families that receive CCB. FaCSIA apply new CCB rates from 1 July each year and the ABS model is adjusted annually to reflect any changes in the profile of CCB families.

8. The sample incomes 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 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 “basket” of child-care services. Over recent years, the LPI 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. In other words, the out-of-pocket expenses that form the basis of the (net) prices recorded in the CPI rise more rapidly than the gross prices charged by the child-care centres etc.

9. Child care in the CPI is stratified by:

• type of care (private, community or family day care)
• length of care (full-time or part-time)
• number of children
• income level
• capital city.

11. The Australian CPI measures changes in the transaction prices of goods and services acquired by private households as consumers (i.e. excluding goods and services acquired for business purposes). The transaction prices that are relevant for the CPI are those that are faced by the purchasers of goods and services at the time they acquire the good or service. These prices include any taxes directly payable in respect of those goods and services (e.g. the GST). Subsidies that are directly tied to the acquisition of the good or service are deducted in determining the transaction price. Income taxes are excluded from the CPI.

12. In assessing whether or not to include the effect of the CCTR on child-care prices included in the CPI, the ABS examined whether it would be possible to estimate the effect of the CCTR on prices paid for child care at the time the services are acquired. The CCTR legislation states that the CCTR is to be paid when families complete their 2005-06 tax returns for out-of-pocket expenses for child care incurred from 1 July 2004. Therefore the amount of the rebate receivable by an individual household for child care costs incurred in 2004-05 is able to be ascertained only after determining the household’s tax liability at the conclusion of the 2005-06 financial year. Families with no tax liability are ineligible for the tax rebate. It is not possible to reliably determine the amount of the rebate applying at the time the child-care service is acquired and so it is not possible to derive a transaction price that reflects the impact of the rebate.

13. The following table (taken from the ABS publication Australian Consumer Price Index: Concepts, Sources and Methods (cat. no. 6461.0)) sets out the criteria that are considered by the ABS when determining whether specific benefits, subsidies and rebates should be deducted from the prices collected in calculating the CPI. ‘Taxpayer’, where noted in the table below, refers to households that are paying income tax.

Table A: Criteria for deducting subsidies and rebates (referred to below as ‘benefits’) to determine prices used in the CPI
Include if:
1) The benefit is tied to the acquisition of a specific good or service (or the right to acquire a specific good or service) AND
2) 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.

Example of how net child-care rates are calculated in the CPI

15. 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. The family has a combined annual income of $65,000. The maximum child-care benefit that can be claimed is $148 per week for one child in full-time care. Families earning $65,000 per year are entitled to 60.12% of the maximum child-care benefit.

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	$88.98 per week	$83.98 per week
Net child-care fee	$151.02 per week	$156.02 per week
(% change)		3.3

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 benefit	$88.98 per week	$88.98 per week
Net child-care fee	$151.02 per week	$161.02 per week
(% change)		6.6

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	$88.98 per week	$83.98 per week
Net child-care fee	$151.02 per week	$166.02 per week
(% change)		9.9

Gross versus net prices

16. The following table compares the price indexes for gross and net child-care fees over the period from September quarter 2005 to December quarter 2006. It should be noted that the gross index is only available from the September quarter 2005 and has a different reference base from the CPI net child-care index.

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

17. The quarterly gross fee index will be made available annually on request after the release of the December quarter CPI.

Further Information

18. For further information, please call Ms Merry Branson on (02) 6252 6006 or email merry.branson@abs.gov.au.