The Estimated Costs of Children in Australian Families in 2005-06 

• 3.1 Costs of children by age
• 3.2 Costs of children by number of children

For the subsequent analysis, our restricted population of families with children was divided into quintiles, with the 20 per cent of such households with the lowest gross incomes being placed in the low income group. In devising the quintiles, sole parents and couples with children were considered separately. Low income families are defined here as the bottom one-fifth of families with children, middle income families are the middle one-fifth of all families with children, and high income families are the most affluent one-fifth of all families with children.

It is also important to appreciate that our study looked at the gross costs of children. In setting out a proposed new Child Support Scheme, the Ministerial Task Force considered the net costs of children, which represented the gross costs minus the contribution made by the Federal Government to those costs via Family Tax Benefit (Part A). Another important difference is that we examined the gross costs of children at various gross household income levels, whereas the Task Force considered the net costs of children at various taxable income levels. Particularly for larger families, there can be substantial differences between taxable and gross income, due to the receipt of substantial non-taxable income through such sources as Family Tax Benefit (Parts A and B).

3.1 Costs of children by age

The costs of children were first estimated for couples with children with a single child in each of the defined age and income ranges. The results are shown in Table 1 and in Figure 1.

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations

Figure 1: Estimated average costs of a single child in couple families, by age of child and family income, 2005-06

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations

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As expected, the direct costs of children increased with the age of the child and with the level of family income. The lowest direct costs of $45 a week were estimated for children aged between zero and four years living in low income families (with average gross incomes of $661 a week). The highest costs of $522 a week were estimated for 16 to 17 year old children living in high income families. Wealthier families were found to spend a greater amount on their children, whatever their ages. Generally speaking, families in the high income group spent more than twice as much on their children as families in the low income group.

While there was a steady rise in the cost of a child as family income increased, when total costs were considered as a proportion of family income, there was a fall as incomes rose. However, the rate of decline was reduced as family income rose (figure 2).

Figure 2: Estimated average costs of a single child in couple families as a proportion of gross income, by age of child and family income, 2005-06

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations

The costs of a child as a proportion of combined family income ranged between 7 per cent (for a child aged 0 to 4 years in a high income family with a gross income of $2662) to 39 per cent (for a child aged 16 to 17 years in a low income family with an income of $661 per week). Interestingly, as figure 1 illustrates, there is much less variation in the direct costs of children by quintile for older children which, in turn, means that the proportion of family income devoted to spending on older children falls sharply as family income increases. High income families with a child aged 16 to 17 spent just twice as much as low income families on comparable children, despite having four times as much income (figure 1). As a result, expenditure on older children aged 16 to 17 years fell sharply from 39 per cent of gross family income for low income families to 20 per cent of income for high income families (figure 2).

In contrast, high income families with a young child aged 0-4 were estimated to spend about three times as much on their child as low income families (table 1). As a result, expenditure on younger children as a percentage of income showed relatively little variation between the quintiles, ranging from 6 to 7 per cent of gross income (figure 2).

3.2 Costs of children by number of children

The next stage of the analysis was to consider the costs of children according to the number of children in the family. For this purpose, the estimates presented represent the costs of children averaged across all the age ranges. (An alternative would be to estimate average total costs for hypothetical families—for example, for a family with one child aged 4 years and another child aged 15, and so on.) It should be noted that this is not effectively an estimate of the average costs of children up to the ages of 17 years, as this would assume that family incomes remain constant across a child’s different ages. This is, of course, not the case, as incomes typically tend to increase during a family’s lifecycle. To calculate such lifecycle costs would require the use of estimates of the average variations in family incomes over the child-rearing years. Such an approach has been adopted by Espenshade in presenting estimates of the total parental expenditure on children (Espenshade 1984) and Percival and Harding (2002).

Table 2 and figure 3 show the cost of children by the number of children. Again the cost of each child was found to rise with family incomes. Low income families with one child were estimated to spend $114 a week on that child, while high income families with one child spent $285 a week.

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Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations. Note that there are only 10 couple with children families with five children in our dataset, so the ‘5 children’ estimates should be treated with extreme caution.

Figure 3: Estimated average costs of children in couple families, by number of children and family income, 2005-06

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations. Note that there are only 10 couple with children families with five children in our dataset, so the ‘5 children’ estimates should be treated with extreme caution.

As figure 4 shows, the cost of a single child amounted on average to between 11 and 17 per cent of family income, for two children 18 to 32 per cent of family income and, for three children, about 24 to 34 per cent. As discussed further below, costs as a percentage of income continued to increase as family size increased, reaching 55 per cent of the gross income of a low income family with four children and 65 per cent of the gross income of a low income family with five children. Costs as a percentage of income declined particularly sharply for large families, dropping to only 29 per cent of gross income for a high income family with four children and 33 per cent of gross income for a comparable family with five children.

The cost of each additional child in families with up to five children is shown in table 3. The cost of the first child is the greatest across all incomes (between $114 and $285). For an average couple with children family the average cost of a second child was approximately 76 per cent of cost of the first child, while the cost of the third child was approximately 61 per cent of the first. The reductions in the average cost of each additional child are a result of both the expenditure constraints and the economies of scale that families experience as their size increases.

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Figure 4: Estimated average costs of children in couple families as a percentage of gross income, by number of children and family income, 2005-06

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations. Note that there are only 10 couple with children families with five children in our dataset, so the ‘5 children’ estimates should be treated with extreme caution.

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations. Note that there are only 10 couple with children families with five children in our dataset, so the ‘5 children’ estimates should be treated with extreme caution.

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It was also found that, in proportional terms, the additional costs of each child diverged as incomes rose. That is, the gap between what families spent on a single child and the additional amounts they spent on subsequent children contracted as incomes rose. At low family incomes of $661, the cost of the second child was approximately 83 per cent of that of the first, while the cost of the third child was approximately 71 per cent of the first. For high income families the cost of the second child was approximately 73 per cent of that of the first, while the cost of the third child was approximately 56 per cent of the first. For five children families the differences are even more marked, with the average marginal cost of the fifth child representing 57 per cent of first child costs in low income families but only 38 per cent of first child costs in high income families.

While the reasons behind this trend are not clear, it may be that lower income families receive greater government assistance relative to the costs of the children than high income families. It may also be that what economies of scale there are with respect to children rise with income. As well, the caution noted at the start of this section with respect to variations in lifecycle incomes needs to be borne in mind when considering these estimates.

The results suggest economies of scale for additional children, particularly for middle to higher income families. As shown in tables 3 and 4, the marginal cost of the second child is always lower than that of the first, while the marginal cost of the third child is lower again. This suggests that the costs of second and subsequent children are lower, as children can share rooms, pass on clothes and toys, and so on. It should also be emphasised, however, that the results also reflect the budget constraints faced by parents. In other words, the marginal costs of the third and subsequent children are lower in part because, at any given income level, parents simply cannot afford to spend the same amount on the third child as on the second.

Source: ABS 1998-99 Household Expenditure Survey unit record file and authors' calculations. Note that there are only 10 couple with children families with five children in our dataset, so the ‘5 children’ estimates should be treated with extreme caution.