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Child care should be made free for families earning less than $80,000, and subsidies increased for others, a government-commissioned inquiry has recommended.

The Productivity Commission was tasked by the federal government with finding a price mechanism that could wipe out many of the costs of child care for families.

It has recommended raising the subsidy to 100 per cent for families on incomes below $80,000, and for subsequent children 5 and younger on incomes below $140,000.

The childcare subsidy “activity test” should also be abolished, the commission has recommended, meaning subsidies would not be limited for people who do not work.

The changes would mean half of all families with one child in care would pay less than 10 per cent of the capped hourly costs of care, and four in five families would receive larger discounts.

The Productivity Commission says doing so would improve early childhood attendance by 10 per cent, with most of that increase being children from low- and middle-income families.

90 per cent subsidy for all families rejected

The commission rejected Labor’s ambition to introduce a universal subsidy that could cover nearly all the costs of care for every family.

It recommended against the model, which would cover 90 per cent of costs for the first child in every family, saying it would be a major expense that would mostly benefit those already well-off.

“Modelling shows that [early childhood education and care] demand would increase as a result of a universal 90 per cent subsidy — but this increase would come overwhelmingly from higher-income families, rather than those experiencing disadvantage,” it found.

“A uniformly high rate of [child care subsidy] would reduce out-of-pocket expenses for some families but not benefit low-income families, who are already eligible for a 90 per cent subsidy rate.”

The commission said its recommended reforms would be a step towards universal care but, at a cost of $17.4 billion each year, was the most cost-effective pathway for reform that most directly benefited lower- and middle-income families.

It has recommended immediate actions to remove the childcare activity test, with increases to subsidies to be started from 2026.

The Coalition claimed at the last election that subsidy could cost $63 billion more to the budget over a decade.