Coalition retreats from scheme to give parents vouchers for nannies

The Coalition will consider increasing the tax-free threshold for parents, allowing tax deductions for childcare costs, or enabling income splitting as it retreats from an early suggestion it could overhaul the childcare system by introducing vouchers for nannies.

Opposition Leader Angus Taylor is under pressure to develop popular policy alternatives after his cornerstone budget reply promises – to tackle bracket creep by handing back $22.5 billion to taxpayers, and to make one of the biggest migration cuts in history – failed to deliver a polling bump.

Taylor has staked out childcare as an electoral battleground with Labor for families’ votes. He will also need to fend off One Nation and win back cultural conservatives who have flocked to the minor party, which wants more parents to stay home with their children.

Opposition childcare spokesman Matt O’Sullivan said Labor’s “one-size-fits-all” model was not working for all families.

“We advocate for a flexible, family-centred approach combining targeted tax relief, genuine flexibility, and practical supports to help families with the cost of raising their children,” the senator said.

O’Sullivan said when he took on the portfolio earlier this year he would canvas a range of policy options including whether families could be given vouchers to pay nannies or grandparents instead of a subsidy for centre-based care.

But the Coalition is now far less likely to pursue the complex and costly policy, according to senior party sources who were not able to speak publicly. About half of children aged up to 5 use the childcare subsidy, meaning fully funding at-home alternatives could significantly increase the cost of childcare on the budget – already one of its fastest-growing imposts at almost $4 billion a quarter.

The system would also be difficult to police and potentially ripe for rorting.

Instead, the opposition is prioritising modelling tax offsets or concessions that could ease cost-of-living pressures on families, including increasing the tax-free threshold for parents.

Income splitting – championed internally by Nationals’ leader Matt Canavan – is also on the table. Income splitting combines a couple’s income for tax purposes, reducing the higher earner’s income so they pay less tax.

Income splitting would cost $12.4 billion over four years, according to Parliamentary Budget Office costings commissioned by former independent senator Gerard Rennick last year.

Taylor’s $22.5 billion tax package leaves less room for costly changes in other policy areas. The Coalition has suggested it will be paid for with savings elsewhere – such as through barring migrants from claiming welfare – but has not put a dollar figure on the cuts, while Labor says the price tag is $12.5 billion short of the actual cost.

One Nation has already adopted income splitting as policy, saying on its website: “It will encourage parents to look after their own children, and reduce the cost to the government of childcare, especially pre-school. It will also encourage homeschooling.”

The nation’s fertility rate has hit a record low as Australians put off having, or opt not to have, children and the cost of raising a child grows to that of a home mortgage. Lower fertility has long-term implications for the number of workers entering the workforce which shrinks the tax base needed to support an ageing population.

Prime Minister Anthony Albanese wants a universal child care system, meaning centre-based care is accessible and affordable for every Australian child.

Labor removed the activity test for the childcare subsidy earlier this year, so all parents could access three days of subsidised care even if they were not studying or working.

But childcare reform was deferred in the government’s budget last month, with Treasurer Jim Chalmers saying the government was “always looking to do more where we can and where we can afford to”.

“As always, we have to calibrate our ambitions to the budget realities that we confront.”

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.