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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 also sets out the change in treatment of the Child Care Tax Rebate (CCTR) that takes effect in the CPI from the September quarter 2007.

2. The simplest way of thinking about the CPI is to imagine a basket of good 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 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 Child Care Benefit (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 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."

6. In summary, 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. The rebate available under the CCTR was not in scope of the CPI prior to the September quarter 2007 because the CCTR was paid through the income tax system and income tax offsets are excluded from the scope of the CPI. In May 2007, the government announced that CCTR would be administered differently. The CCTR ceased to be a tax offset and instead is now be paid directly to families as a rebate by the Family Assistance Office (FAO). 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.

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 and CCTR entitlements. 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.

8. Gross fees are collected from a sample of the child care centres 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.

9. FaCSIA apply new CCB rates and CCTR limits from 1 July each year and the ABS approach is adjusted annually to reflect any changes.

10. 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 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.

The Child Care Benefit (CCB)

11. CCB is administered by the Department of Families, Community Services and Indigenous Affairs (FaCSIA) and delivered by the 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 $168.50 per week for one child in 50 hours of CCB-approved care) is available to families with incomes up to a threshold of $35,478 a year. Once a family's income exceeds this threshold, the amount of CCB tapers at a varying rate (as income increases). The CCB tapers down to a minimum rate, currently $28.20 per child for 50 hours of care per week. 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 $108,434 and families with two children in care with an annual income of over $115,900 receive the minimum rate. Children using part time care attract a slightly higher rate of CCB per hour than those using full time care.

The Child Care Tax Rebate (CCTR)

12. The Federal Government announced that it would introduce a 30% Child Care Tax Rebate (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. The limit for 2007-08 is $4,354.

13. For child care costs incurred in 2004/05 and 2005/06, the CCTR could 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).

14. In 2007, the Government removed the CCTR from the tax system. From the 2007/08 financial year, the FAO will pay the CCTR 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.

Benefits, Subsidies and Rebates in the CPI

15. The following criteria (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.

17. The change to the administration of the CCTR payment, for child care costs incurred from 1 July 2006, means it no longer depends on families' tax liability, now satisfies both criteria and is in scope of the CPI. Therefore, from the September quarter 2007 onwards, the CCTR is included in the CPI calculation as a rebate.

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

18. 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 CCB that can be claimed is $168.50 per week for one child in full-time care. Families earning $65,000 per year are entitled to 66.31% of the maximum child care benefit. The CCTR is 30% 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	$111.73 per week	$106.73 per week
Eligible CCTR	$38.48 per week	$39.98 per week
Net child-care fee	$89.79 per week	$93.29 per week
(% change)		3.9

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 CCB	$111.73 per week	$111.73 per week
Eligible CCTR	$38.48 per week	$41.48 per week
Net child care	$89.79 per week	$96.79 per week
(% change)		7.8

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 CCB	$111.73 per week	$106.73 per week
Eligible CCTR	$38.48 per week	$42.98 per week
Net child care	$89.79 per week	$100.29 per week
(% change)		11.7

20. From the table below it can be seen that many components impact on this "net" index. In the September quarter 2007 the "net" index shows a reduction in "out-of-pocket expenses" with the impact of the inclusion of the CCTR as a rebate for the first time and the additional 10% indexation of the CCB rates on top of the usual annual CPI indexation.

21. Over time it can be seen that the "net" index generally rises more rapidly than the gross prices charged by the child care centres. This is because 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. The CCTR does take up some of this gap as it is calculated as 30% of the difference between child care costs and CCB for approved care up to a limit of $4,354 per recipient per child in 2007/08.

22. 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 centres.

	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

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

Further Information

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