Why Government decision to scrap Labour rules could lessen competition and push up ECE fees

Government officials have confirmed what almost every knew parent already knows – early childhood education (ECE) is extremely expensive.

But what officials don’t know is why the cost of ECE has risen so
steeply in recent years, with officials from Inland Revenue and the Ministry of Education complaining in a Regulatory Impact Statement on the Government’s “FamilyBoost” ECE tax credit that they have little in-depth knowledge of why ECE had become so costly.

Officials think this is a serious problem. Higher costs could see families drop out of ECE altogether, with serious consequences for parents trying to re-enter the workforce.

Officials warned that one of the big problems for fees is a lack of fee transparency, which has resulted in poor competition and higher prices.

Families who don’t have accessible and clear information on fees are unable to seek out the best and most affordable provider. Despite this, one of the Government’s first decisions on coming in to office was to axe three measures the previous Government had introduced to improve transparency.

Minister for Regulation and Associate Education Minister David Seymour told the Herald he was aware of officials’ advice on transparency and thought the point they made was a “good one”.

“I think the funding structure has been made complex by the layering of policy over the past 20 years, we are going to review it,” Seymour said.

OECD research shows Kiwi couples pay 37 per cent of their income towards childcare, nearly triple the OECD average of 13 per cent, and higher than rates in Australia, where couples spend 22 per cent of their income on ECE. Uptake for ECE is high, with 76 per cent of families with 4-5 year-olds overall paying for care.

The officials warned that “without Government intervention” it was very likely that high rates of general inflation would “result in ECE costs continuing to increase”.

Officials warned rising costs would mean “an increasing number of families may no longer be able to afford some ECE hours”.

“This may restrict their ability to work or could result in pressure on other types of family spending to maintain ECE hours, consequently reducing families’ income adequacy, work incentives and/or ECE participation rates,” officials warned.

The ECE sector is comprised of private entities, mainly charities and businesses, that source funding from a mix of fees and subsidies from the government.

Officials said there were five main government supports for the sector (although the extent to which Working for Families tax credits, which go directly to families, are actually an ECE support, is debatable):

Both Labour and National tried to court young parents with ECE policies at the election. Labour extended 20 hours free ECE to 2-year olds. National campaigned on scrapped this and implementing its own policy, which is a 25 per cent rebate on fees up to $75 a week.

Seymour has said the sector will also be the subject of the new Ministry for Regulation’s first regulatory review, which will aim to unburden the sector of regulation. A better regulated sector could result in better fees for families.

When she announced the FamilyBoost policy in March, Finance Minister Nicola Willis said she was confident providers would not simply put up fees saying there was “a pretty competitive market in ECE.

“I think a lot of ECEs actually are on the side of parents and they actually want parents to be able to use their services and actually access these funds,” she said.

Officials advising her on the policy were less sure. They warned that one thing leading to higher fees was a “lack of fees transparency” for families sending their children to ECE. Families being unable to get a breakdown of fees, or to easily compare ECE fees, was creating an inefficient market.

“[L]ack of fees transparency resulting in inefficient markets (from information asymmetries), increasing operating costs, and demand exceeding the supply of ECE centres in some locations,” were all driving higher fees, officials said in the RIS.

The Government has promised to roll out the FamilyBoost by July 1 this year, and has chosen an administratively burdensome model in order to hit this deadline.

Officials said had the roll-out time been slightly more generous, they would have liked to consider whether it was better to reduce ECE fees by directly subsidising providers, introducing regulatory price controls, or looking at ways to increase the incomes of families who used ECE through other support.

IRD would have preferred the Government to build a system that automatically calculated a family’s rebate, but Willis said this would take “two to three years”.

Officials preferred this option, thinking it the most likely to promote fee transparency and therefore drive competition, although they believed the option chosen by the Government would go some way to promoting transparency.

Despite this, the Government’s actions so far have been to reduce fee transparency.

The Ministry of Education noted on its website that when the new Government scrapped Labour’s extension of 20 hours free ECE to 2-year-olds in December’s mini-Budget it also reversed three transparency regulations: forcing providers to set fees by the hour, publish existing fee schedules, and to submit these schedules to the Ministry of Education.

The Former Education Minister and Labour’s Education spokeswoman Jan Tinetti, said officials were right to point out there was little transparency around fees, and said the new Government should not have scrapped those three measures that would have encouraged transparency.

“We wanted transparency about those fees. This government scrapped that change,” Tinetti said.

Officials warned that other “non-monetary regulations” were also driving up fees. Seymour agreed with this, saying that he was more keen to reduce the sector’s regulation through the Ministry’s review than to beef-up Government data collection.

Seymour said he had a “pretty good idea” of what had been driving ECE cost inflation.

“I think frankly one of the issues is the amount of time they have spent in Ministry of Education compliance activity. That is something we are addressing,” Seymour said.

He said another issue was “increasingly stringent requirements for pay rates and qualifications. They were required to have a person in charge with a certain level of qualification. In theory, that person goes to the bathroom, you’ve got to shut the centre down, now obviously you’re not going to do that, but what you might do is pay a very expensive temping agency so you can meet that requirement.

“You might say its absolutely necessary to do that, I’m not disputing whether it is right now but that’s an example of why they have greater cost,” Seymour said.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.