Ken Boessenkool Argues for a Childcare Baby Bonus

Accessible and affordable childcare will play an outsized role in determining whether mothers will recover their pre-COVID levels of employment and wages.

MAX Policy is a collection of provocative ideas and policy solutions generated by the minds at the Max Bell School of Public Policy.

The COVID-19 pandemic has exposed cracks in the foundations of our social infrastructure. For example, the pandemic has had a greater negative effect on women in general, and women with young children more particularly, than previous recessions.

Childcare is playing a clear role in the slow return of women to the labour force. Whether they cannot find adequate childcare or they are reluctant to put their children into childcare during a pandemic, what is irrefutable is that mothers with young children have been slow to recover from the initial pandemic shock. By September, among parents with kids under six, moms were still far behind in their total paid hours (relative to pre-pandemic) while dads had more than regained all of their lost paid hours. Given an aging population and prospects for far slower economic growth in the future, Canada cannot afford a longer-term exit of women from the workforce that might be caused by a temporary exit created by the pandemic.

A deep and/or prolonged second wave of COVID-19 will surely make all of this much worse as it threatens to once again shut down childcare and our schools.

Accessible and affordable childcare will play an oversized role in determining whether mothers will recover their pre-COVID-19 levels of employment and wages. That matters because growth in family income during the 1980s and 1990s came largely from rising female labour-force participation rates; since then it has largely come from rising average female wages—specifically, from increased representation of women in high-paying managerial and professional occupations.

Several short-term temporary policies could and should be pursued as part of the recovery—or, indeed, as long as the pandemic threat remains. Dr. Jennifer Robson and I have provided some specific suggestions. Noah Zon and I have provided suggestions on pandemic-specific parental leave policies. There is a real fear that failure to address these issues during the pandemic, or to assist in the recovery, could cause a permanent erosion in the supply of childcare. Childcare providers that were on a precarious financial footing prior to the pandemic may yet close down before it is over. It is particularly worrying that governments have not yet made it a priority to protect, preserve and expand childcare in their re-opening and recovery plans.

The focus of this paper is on the creation of new childcare spaces. I propose a new benefit intended to boost capital investment in childcare in order to increase the number of childcare spaces in Canada. Jennifer Robson and I have written elsewhere about tax reforms to support childcare and have a forthcoming paper on a wider number of issues surrounding childcare.

Canada’s Childcare Infrastructure

Without getting into the nitty gritty details or the exceptions in the very different approaches across provinces, at a very high level the federal tax measures and transfers to families operate primarily on the demand side of the childcare equation while the provincial policy operates primarily on the supply side.

Federal: Demand Side Policy

The Childcare Expense Deduction allows parents to deduct from their taxable income up to a maximum of $8,000 per child for children under seven years, with different amounts for older children and children with disabilities. On an annual basis, this deduction costs approximately $1.5 billion in foregone federal tax revenues, before counting provincial income tax. This tax support is only available to the extent that the lower income spouse, who must claim the deduction, earns enough money to qualify. All else being equal, the deduction offers little support to families with low and modest incomes. whose income earners have relatively low tax liability.

Different federal governments have, at various times, argued that federal child benefits should be counted as part of total federal spending on childcare. Child benefits may be used for a wide range of goods and services that enhance the development and well-being of children, including, but not limited to, early learning and care. The primary federal benefit available to families not directly linked to childcare is the Canada Child Benefit—an income-tested per-child benefit that pays up to $6,700 for children under seven and up to $5,600 for older children. Supplementing this for lower income families is a GST/HST Credit that pays benefits based on income and includes a supplement for each child. Finally, the federal government has a modest wage subsidy program (The Canada Workers Benefit) for lower income workers.

Since 2017, the federal government has made annual transfers to provinces totaling $391 million under bilateral agreements intended to implement the 2017 Multilateral Early Learning and Childcare Framework. This is on top of the existing carve-out of $250 million annually in the Canada Social Transfer earmarked for childcare. As part of the Multilateral Framework, the federal government also committed money to close data and research gaps. The initial agreement was signed for two years but extended to the end of 2020. Combined with the recent Throne Speech, which mentions a “significant, long-term, sustained investment to create a Canada-wide early learning and childcare system,” it is clear the federal government intends to make a big investment in childcare.

Provincial: Supply Side Policy 

It would be impossible in the space available to describe all of the different provincial supports for childcare. Broadly speaking, provincial supports can be put into one of the following three buckets.

Licensing and Regulation: Provinces oversee the licensing and regulation of childcare—primarily via child/caregiver ratios, child/physical space ratios, the education or training levels required for caregivers, and licensing and inspections for health and safety compliance. Some municipalities are also in the game with municipal programs requiring an additional level of regulatory oversight, including their own inspections.

Number of Spaces: Provinces provide various types of funding in the form of operating and capital grants to providers and sometimes wage subsidies for early learning and care (ECE) workers. For example, Ontario has an annual capital fund for construction or renovation of new childcare spaces, but only in public school properties. In British Columbia, home childcare providers who want to upgrade to meet provincial licensing can apply for a grant to cover some of the costs, and licensed non-profit providers in the province can apply for a modest wage subsidy for qualified ECE staff. Quebec, which spends more than all other provinces combined, offers operating funds for childcare providers, support for agencies coordinating licensed home care, as well as covering pension and insurance costs for many ECE workers. In all provinces, including Quebec, childcare centres are run by a mix of licensed providers across non-profit, for-profit and public sectors, as well as homecare providers with licenses and smaller home care providers that are subject to regulations on a maximum number of spaces before licensing is required.

Targeted Supports: Provinces also provide more targeted childcare supports through subsidies on spaces. When these subsidies are attached to providers, as is the case in Quebec and other jurisdictions, families must shop around to find a subsidized space, even if they meet any applicable income tests. In Ontario and BC, income-tested subsidies have been converted into portable benefits that follow a child, even though the subsidy is paid directly to an eligible provider. Quebec has the most comprehensive and complete suite of provincial supports that includes subsidized spaces as well as a generous refundable credit. Ontario has also recently converted the provincial portion of the Childcare Expense Deduction to a more generous refundable credit. It should, however, be noted that the change came with an equivalent reduction in operating grants for providers.

Messy, But Logical

This childcare infrastructure is far from neat and tidy, but it does have an overarching logic to it. Ottawa provides broad-based income support, research, and fiscal room to provinces via transfers. Provinces oversee childcare on the ground. They regulate and license providers, provide operating and capital grants to providers, transfer funding to local authorities for local publicly-run programs, and offer different forms of targeted supports.

The non-governmental side of Canada’s childcare infrastructure includes a rich mix of providers and childcare options. There are fully public providers in public spaces all the way to nannies employed by families to work in their home. In between are charitable, non-profit, and for-profit providers. There are family or day-home providers, licensed and unlicensed care, and informal care provided by parents, relatives, or friends. To add to this, there are early learning and child development programs that take place in high-quality care settings and others that depend on parental involvement or drop-in models. Families have different needs for learning and care, and no single form of programming and provider can meet all their needs.

Childcare provision in Canada is far from a one-size-fits-all approach. It is, rather, a rich tapestry of options where parents are best able to determine what their own family needs. The problem, however, is that many families don’t have real choice. They are constrained by what they can afford and by what happens to be open in their community when they are looking.

A Childcare Policy Gap

One of the most pressing policy challenges for childcare is adequate creation of new spaces. In 2016, 71% of women aged 15 to 44 with a child under the age of three in the household participated in the labour market, compared with 77% of their counterparts with no children or with older children. This is partly because there are only enough regulated childcare spaces for one in four children. Provinces have tried various methods to increase supply—from direct government building to capital or operating grants to boosting parental support to drive demand—but the shortage of spaces continues.

The vast majority of government support for childcare spaces comes in the form of operating grants for existing spaces. This is, as already discussed, on top of generous tax support. For childcare, the serious policy gap in Canada is about the creation of new spaces—specifically the need for new money directed towards the capital cost of constructing new spaces.

A significant challenge for current policies in terms of creating new spaces is determining where those spaces are most needed. Providing equal per capita supports across jurisdictions ignores the reality that some places have higher demand for childcare based on the number of young children. Providing equal supports to existing providers risks increasing funding for existing spaces rather than focusing incremental dollars on building new spaces where that demand is greatest.

Funding for new spaces also needs to recognize cost differences in where these new spaces are provided. The cost of a new space in Toronto or Vancouver is not the same as the cost of a new space in Thunder Bay or Prince George. In addition, costs of childcare spaces in remote communities may also present special financial and other challenges. Varying payments based on cost of provision is not a novel idea for social service provision.

Another growing challenge, particularly in Canada’s largest centres, is finding a childcare space when a family has a new child. The City of Toronto, for example, operates its own early learning and childcare services registration program because those programs have waitlists. There is also a Toronto New Mom Blog that urges new moms to “put your name on a waiting list while you are pregnant, as the waiting list for some of the centres is around a year and 2 months.

At most hospitals in Canada, when a new baby is born, that child is registered with the provincial and federal government so that the many and generous child benefits available from both governments begin to flow immediately.

I propose to add one more.

A Proposed Childcare Voucher

I propose that when a baby is born, the parents are given a one-time voucher that they can bring to their childcare facility. That voucher would enable a one-time payment to flow to that childcare facility on the first birthday of that child. This would be a one-time payment only and align with recent changes to maternity/paternity benefits.

The purpose of the voucher is not to assist with the operating expenditures of existing or new childcare spaces but rather provide an injection of capital for the purposes of creating new spaces. Therefore, the dollars should flow as a single lump sum on the first birthday of the child.

There are options for the type of care that could attract this voucher. The broadest would be to allow the voucher to flow to any childcare option eligible for the federal Childcare Expense Deduction which would give it a very broad coverage and include things like in-home nannies or other receipted care. A narrower option would be to allow it to flow only towards provincially accredited and regulated care. The latter option would tie the benefit more clearly to the creation of new spaces, and would increase the creation of regulated spaces. Neither option would allow the benefit to be accessed for non-paid care. This is consistent with the intent of the benefit which is to create new childcare spaces rather than to subsidize the cost of existing care (for which there are already numerous well-designed policies).

Such a childcare voucher would target money where new spaces are in highest demand—places where more children are being born. It would also go some way to addressing the challenge (assuming existing supports remain and this is funded from new dollars) of creating new spaces to match the birth of new children, and relieve a significant stress for parents.

This portable benefit should be based on the size of the metropolitan area in which the child is registered; for example, a minimum of $1,000 for rural childcare, up to a maximum of $5,000 for childcare in Canada’s largest cities, with intermediate values for childcare in smaller cities or large towns. Ideally – though this would be an administrative challenge – that regulated childcare facility would have to demonstrate capital improvements made to that facility or a new facility. Provincial governments that already subsidize operating costs – most of which are based on an application-based model – would have the information to oversee this. Alternatively, to reduce administrative costs and because money is fungible, we could let the market work to allocate these dollars to where they are needed most.

Some people may criticize this proposal on the basis that providing larger benefits to parents in large cities will mean that larger benefits will likely flow to families with higher incomes, as incomes typically rise with the size of city. This is the inevitable result of tying a benefit to the cost of provision because costs also increase with city size. Other benefits for childcare are, or ought to be, tied to family income. This voucher will be tied to the creation of spaces, regardless of the income of the individual using that space.

An equivalent way to design the voucher is to make it a flat $1000 for all families with new babies, but to supplement it with more value—up to an additional $4000—based on regional cost variances. Those cost variances could be size of city or whether provision is in a remote community (as opposed to rural). Doing so would allow the benefit to bear some relationship to the cost of creating a new space across different jurisdictions, with relatively more money flowing to larger cities where the cost of creating spaces is higher.

Statistics Canada reports that in 2019, 60% of children under six participated in some form of formal or informal childcare. Among those in care between the ages of one and three, almost 60% were in a form of regulated care. If we paid the maximum benefit ($5,000) to all of those, the cost of the program would be over $650 million. If we paid the lowest amount ($1,000) to all those children, the annual cost would be under $150 million. Given that just under one third of Canada’s 372,000 live births occurred in Canada’s largest cities and that those families are more likely to choose childcare, an absolute cost of $500 million seems like a reasonable estimate for the overall national program.

My proposed voucher for childcare in Canada is a new idea, but I am certainly not the first person to discuss vouchers more generally. Vouchers for education have been a source of much debate over the years, with the primary opposition coming from those who oppose shifting money from publicly funded options to privately funded options. However, most of Canada’s childcare system is delivered by private operators and a voucher system wouldn’t shift that balance. Some argue that all childcare should be government run and operated, yet while there are clearly shortages in provision and there is a need to subsidize care, the complete takeover of childcare by governments would be both an excessive overreach and unnecessary. To the extent there are market failures in childcare, these can be better addressed by subsidizing its use and provision, rather than through the wholesale takeover by government.

Provinces or the Feds?

The most straightforward way for such a childcare voucher to work would be for provinces to create and oversee it. Provinces regulate and license childcare in Canada and as such they are much better placed to oversee the delivery and appropriate expenditure of this money as a way to expand spaces available where they are needed most. Provinces deliver various child benefits as well that get initiated at the birth of a child, so this new voucher could easily be integrated into those systems.

Provinces are also better placed to make sure that these funds aren’t used to displace existing care spaces in favour of catering to this new cohort of children with extra benefits—a potential negative outcome from such a program. Given the many other supports that currently exist (from tax support to parents to existing operating grants to childcare facilities) and which should not be replaced by this program, this should be less of an issue.

There is, however, a case to be made that the federal government might consider initiating, or at the very least funding, this new benefit. As noted above, the federal government clearly signaled in its 2020 Throne Speech its intention to spend more money on childcare, and already spends money on transfers to provinces ostensibly for childcare. The challenge with these existing federal-provincial transfers is that they are based on existing provincial priorities and have been paid out as a series of bilateral deals with provinces.

So, the first argument for getting the federal government involved is to say that the federal government should focus its spending on a specific item or for a specific outcome, rather than merely be a funding source for existing provincial priorities. In short, if the federal government is going to have a role in childcare, it should pick a lane. Even recent COVID-specific new federal funds for childcare were delayed longer than was necessary and ended up being a series of bilateral agreements that merely accorded with provincial—not federal—priorities.

We should not pretend that all the ills of childcare would be solved if we could just get the federal government to “do more” or “force recalcitrant provinces to do more.” Our health-care system is a cautionary tale. Some make the case that the Canada Health Act conditions on federal transfers to provinces for health care are all important, but is there a single nation-wide innovation that the federal government has “bought” with the billions it has added to health care? No. However well or badly Ottawa regulates the prices of drugs—it is an example of a clear lane in which it operates. Likewise, if the federal government wants to expand its presence in childcare, it should pick a narrow lane and stick with it.

The second reason for getting the federal government involved is that, coming out of this pandemic, the federal government is much less fiscally constrained than the provinces. Ottawa has the fiscal capacity to make new investments in childcare. In fact, it arguably has the capacity for a much more generous portable benefit than envisioned here.

The third reason is that federal financing creates some interesting incentives for providers and provinces. Childcare providers will have an incentive to maximize their revenues by becoming provincially regulated entities—moving more childcare to regulated care. Provinces will have an incentive not to overregulate to maximize the federal revenues in their provinces.

Conclusion

One of the most acute challenges of childcare policy in Canada is the creation of adequate spaces. One option to address that challenge would be the creation of a childcare baby bonus that gave new parents a voucher—with an amount based on population—that they could cash at a childcare facility on the first birthday of their child. This voucher would focus money where it is needed most, and vary it based on cost to construct new spaces.

On the face of it, provinces should create and oversee the delivery of such a new voucher; they are the level of government most involved in the creation of new spaces and would be best placed to ensure that providers use this voucher to create new spaces, not offset the cost of existing spaces.

However, coming out of the pandemic and with the federal government intent on spending more money on childcare, an argument can be made that Ottawa should focus its dollars in a specific area rather than merely co-funding provincial priorities as they’ve done to date. The federal government could, at the least, fund such a voucher that is delivered by the provinces or, at the other extreme, deliver this program directly, which would require the cooperation of provinces to ensure money flowed to licensed facilities and didn’t merely offset existing dollars.

This is particularly pressing as a second wave threatens to exacerbate the already worrying employment situation of women with small children. As the pandemic drags out, there is a growing threat that any losses in female labour-force participation could become permanent. This is a national challenge and a program like this should be part of our national recovery plan—available in all parts of the country regardless of the provinces’ fiscal capacity or priorities. The federal government might even consider making it retroactive by launching the program for children whose first birthday was in 2020.

The pandemic has highlighted the crucial importance of childcare and in particular the importance of its adequate supply. A childcare baby bonus would be one way to address this challenge.


About the Author

Ken Boessenkool is the J.W. McConnell Professor of Practice at the Max Bell School of Public Policy at McGill University.

He is also a Research Fellow at the CD Howe Institute, contributor to The Line and President and founder of Sidicus Consulting Ltd.

Until recently, Ken was a founding partner of Kool Topp & Guy Public Affairs with Don Guy and Brian Topp. In the course of his career, he has served as Senior Counsel at GCI Canada, was Senior Vice President and National Practice Director for Public Affairs at Hill & Knowlton Canada, where he was also General Manager for Alberta and Manager of Business Development. Ken was a senior regulatory economist with two electricity firms. He once worked at a bank.

Ken has played senior strategic and policy roles in four national election campaigns for the Conservative Party of Canada under the leadership of Prime Minister Stephen Harper. He has been Chief of Staff to former Premier of British Columbia Christy Clark, a senior policy advisor to three national Conservative leaders, two Alberta Finance Ministers, and an Ontario Progressive Conservative Leader. He has played senior policy or campaign manager roles in three national leadership campaigns and three provincial leadership campaigns.

Ken is the Board Chair of Sonshine Community Foundation – a Calgary based women and children’s shelter. He has served on the following boards: The Canada-Israel Committee; The Cantos Music Foundation (now the National Music Centre); The Canadian Friends of Hebrew University, Civitas and the Forum of Federations.

Ken has published numerous policy and academic papers on a range of key national issues and is a frequent contributor to numerous online and print publications.

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