Insights

Childcare subsidy changes: Big gains for families, a growing challenge for supply

Posted April 16, 2026

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Liz Webster

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Policy analysis

SGS Economics and Planning Childcarereforms

The Federal Government’s childcare subsidy reforms mark a major step toward a more accessible system. But as affordability improves, pressure is building elsewhere, exposing the limits of existing supply.

The Federal Government’s recent changes to the childcare subsidy (CCS), marketed as the Three Day Guarantee [1], came into effect in January 2026. The reforms make the CCS available to more families for more hours each fortnight – at least 72 hours for all families, or up to 100 hours if all primary carers are doing more than 48 hours of recognised participation [2]. Families with annual household incomes up to $535,279 are eligible for the subsidy, with the highest subsidy rate (90%) applying to families on the lowest incomes and reducing progressively as income increases. The subsidy can be used for different forms of Early Childhood Education and Care (ECEC), including long day care, integrated kindergarten/preschool, occasional care, outside school hours care, in-home care, and family day care.

The reforms are expected to save families an average of $1,370 per year [3]. While the reformed CCS does not entirely replace the “activity test” that required families to demonstrate work or study to be eligible for subsidisation, it does scale it back to two days of the work week. It’s a move that’s been praised by the Australian Childcare Alliance [4] and other peak bodies as an important step towards a universal ECEC system in Australia. Economists, advocacy groups, and social service providers have likewise celebrated the CCS’s expansion, given the wide-ranging and well-documented benefits [5] of ECEC for childhood development, family choice, and associated social and economic outcomes.

When subsidies boost demand faster than supply

A policy change that makes childcare cheaper and more accessible is a positive one, but implementation – where intention meets reality – is a messy and costly business. When government increases subsidies, demand rises. Families who were previously priced out, juggling informal care or limiting their hours, suddenly find childcare within financial reach. That’s exactly what the 3-Day Guarantee is designed to do. The challenge is that this surge in demand can occur virtually overnight, while supply takes years to catch up.

It is difficult to forecast service demand in the early years of implementation for a reform such as this. A complex suite of family choices will be the ultimate drivers behind what’s likely to be an increase in both the number of children who enrol in childcare and the average number of hours a child is enrolled.

Modelling from the Productivity Commission estimated that this reform would generate an increase of 45,100 children attending childcare [6]. Assuming each of those children takes up the 3-day guarantee, we estimate that this equates to around 27,200 additional childcare places needed to accommodate that segment of demand alone as a result of the reforms. In some states, including South Australia and Victoria, demand is surging even higher due to the simultaneous rollout of kindergarten/preschool reforms. On top of this, population growth is further driving greater demand for services.

If the supply of childcare facilities and services doesn’t expand at the same pace, the system will strain, and additional demand will have nowhere to go. In these conditions, providers often respond in the only ways available to them: raising fees or limiting enrolments

This risks undermining the very goal of the reform— to make childcare more affordable and accessible for families. In other words, without swift and sufficient investment to expand ECEC capacity, the additional subsidy may end up in providers’ pockets rather than families.

More supply is on the way, but not enough

Recognising the need for a supply boost, the Commonwealth Government announced a $1 billion Building Early Education Fund (BEEF) [7]. The investment is intended to help build new childcare centres and expand existing ones, prioritising areas with existing shortfalls and co-location with school sites.

New and expanded services are already being delivered across Australia, including in outer suburban and regional communities where access to ECEC is limited, or missing altogether [8]. Many state and territory governments have also announced ECEC infrastructure funding packages, such as NSW’s Childcare and Economic Opportunity Fund.

With construction costs continuing to rise in Australia [9], delivering new and expanded childcare centres will come at a high price tag. Investment in existing sites avoids costly land acquisition but often requires renewal of existing capacity alongside expansion. The Department of Education reported a figure of $170 million for building or expanding 11 ECEC services in Victoria [10]. By their estimates, this investment will result in around 1,110 additional places, and these are likely to be utilised to deliver a mix of ECEC services. That equates to a cost of approximately $155,000 per additional place created.

At that rate, the estimated cost to government to deliver the additional places demanded by families taking up the 3-day Guarantee totals nearly $4.2 billion. Against that, the $1 billion BEEF will leave around 75% of demand from new children accessing childcare to the private market, at a time when the quality and safety of the sector is being questioned following reports of systemic failures to prevent abuse and neglect [11].

Delivering additional capacity is also slow. Even once buildings are built, there is still the challenge of staffing them. The Commonwealth Government has launched a National Children’s Education and Care Workforce Strategy and has committed $3.6 billion to lift the wages of early educators. But acute, structural shortages already exist [12], driven by poor retention and training constraints [13].

A role for cost-saving infrastructure models

Alongside further investment, government may consider cost-effective measures for infrastructure delivery. Modular construction has been successful in reducing costs and timeframes. In one example, a childcare centre and community hub comprised of 4 prefabricated steel-framed units was constructed in 6 months for $550,000 [14]. Innovative service delivery models may also be effective in temporarily filling gaps or providing a cost-effective model in remote communities. The District Council of Robe in South Australia runs a Childcare on Wheels service across 4 locations each week using equipment that is easily set up and packed down each day [15].

These models hold some promise, but are not without their own unique challenges. The scale of investment required — and the time it takes to translate them into real-world delivery — is inescapable. In the short term, at least, the limited supply of childcare is likely to continue to chase rapidly growing demand. For the reform to deliver on its promise, supply needs to be treated as a system-wide challenge, with funding, planning and delivery aligned to where demand is growing. At SGS, we work with governments to understand these pressures, assess infrastructure and workforce gaps, and shape practical responses that support a more equitable and sustainable ECEC system.