Anthony Albanese has promised a re-elected Labor government would abolish the childcare activity test and offer three days of subsidised care to families earning up to $530,000 a year.

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The proposal would scrap the activity test, which determines the level of childcare subsidies parents get based on the number of hours they work, opening up childcare to an estimated 150,000 children.

Removing the activity test was “the first plank towards a truly universal system”, Impact Economics and Policy lead economist Angela Jackson said.

“We can see very clearly that the current market just isn’t working,” Dr Jackson said.

Over the past year, childcare fees have increased by 10.6 percent, eroding the benefits of the $5 billion Cheaper Child Care Reforms introduced in July 2023.

“I think the next step is to really have a look at the way in which support for people using early childhood education and care has often failed to deliver in terms of access, quality and the cost, and whether or not we need some really fundamental reform,” Dr Jackson said.

A $1 billion fund to build or expand more than 160 early childhood education and care services has also been announced, following parliament’s approval of a 15 percent wage rise over two years for early childhood educators.

“I can’t tell you how important this week was for these kids who were missing out from disadvantaged backgrounds,” Dr Jackson said.

The fund, which will prioritise not-for-profit and government centres, will give providers more security through direct funding and had genuine potential to eradicate the nation’s childcare desert, The Parenthood’s Maddy Butler said.

A childcare desert is an area where three or more children compete for one childcare place, and they predominantly exist in outer-suburban, regional, rural and remote communities.

“The current early education market has failed country towns,” Ms Butler said.

“Providers don’t have the financial incentive to set up or stay open there and the early educator workforce means existing services often can’t run at full capacity.”

Jay Weatherill, from Minderoo Foundation’s Thrive by Five campaign, said the fund was “what rural and outer-suburban communities have been crying out for”.

“Not having access to childcare and early learning affects everyone, because parents can’t get back to work when they want to, and local businesses and services suffer,” the former South Australian premier said.

“The next step should be a commitment to free early learning for low income families and a $10-a-day cap on out-of-pocket fees for everyone else.”

Labor is believed to be considering the cap as a federal election promise as it pursues its long-term goal of universal childcare.

Parents pay about $50 per child per day, and childcare was recently identified as the third fastest-growing cost in the Consumer Price Index.

Each time governments increased subsidies, the value of the gains was eroded by increases in the cost of care, Dr Jackson said.

“The current market settings encourage providers to charge higher fees, rather than drive more cost-effective and higher quality care,” she said.

A supply-side system, where providers were funded based on service delivery costs and parents paid $10 to $20 per day, was “wholly achievable”, she said.

“There are debates about whether… higher-income earners should contribute more, and I think you can have those debates within this context,” she said.

Australian Childcare Alliance president Paul Mondo said rushing change increased the chance of getting it wrong and causing long-term damage to the sector that would be difficult to reverse.

A report commissioned by the alliance found that if the costs of delivering high-quality services weren’t considered in supply-side funding, centres might be forced to take a minimalist approach to staffing.

“Universal application of a supply-side funding model would be complex and costly to get right, taking years to implement which is too late for many families struggling under the cost-of-living crisis that is happening now,” Mr Mondo said.

Dr Jackson said there was no need to rush into a supply-side system and it could be delivered sensibly.

“We need to outline just how a universal system could work, and how it can be delivered in a way that we know the benefits of the additional government investment aren’t going to be eroded,” she said.

The government’s proposals were a “game-changer” that would mean thousands of Aboriginal and Torres Strait Islander children could access early education and care, SNAICC – National Voice for our Children chief executive Catherine Liddle said.

“The activity test effectively denied many children the opportunity to access crucial early learning services,” she said.

“Our families are five times more likely to access only one day of care as a result of the activity test, and many families disengage completely because of the small amount of subsidised care available.”

Dr Jackson said it was important to recognise that childcare was “a critical market for the Australian economy”.

“It’s the key mechanism by which we invest in the next generation of workers, but it is also a huge enabler in terms of participation of women,” she said.

“So if we can get the market working in terms of the quality and the cost and access, then we can also help unlock a lot of economic potential.”

By Abe MADDISON, AAP