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Income Contingent Loans for Paid Parental Leave


  • Bruce Chapman
  • Tim Higgins


In early 2008 the federal government instructed the Productivity Commission (PC) to enquire into the social and economic policy issue of paid parental leave (PPL). In their draft report, the PC (2008) has called for a taxpayer funded scheme of 18 weeks duration, despite Australian governments having so far resisted the introduction of a broad grants-based system. A case for government subsidy of PPL can be made on the basis that the social benefits exceed the advantages accruing directly to families. However, as there are also indisputable private benefits accruing to the parents taking leave, there is a case for private contributions. We identify a market failure in that commercial banks will not provide funds in the absence of collateral due to repayment uncertainty during parental leave, a situation quite similar to the market failure inherent with respect to the financing of tuition for higher education (Gans, 2008). To address this financing impasse, we consider how an income contingent loan (ICL) could be used as an optional supplement to a taxpayer funded PPL scheme. Moral hazard and adverse selection are critical policy issues and these are addressed in the scheme design by: restricting loan duration and size; restricting eligibility to parents with workforce attachment; reducing minimum repayment thresholds to below those of HECS; imposing a loan surcharge, and; making the debt an obligation of both parents. We explain and present simulations of debt, repayment and subsidies for different households. The results show that an optional top-up ICL would not require major contributions from taxpayers, yet would introduce flexibility and choice, and provide consumption-smoothing and lifetime income distribution advantages over possible alternatives.

Suggested Citation

  • Bruce Chapman & Tim Higgins, 2009. "Income Contingent Loans for Paid Parental Leave," CEPR Discussion Papers 596, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  • Handle: RePEc:auu:dpaper:596

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    References listed on IDEAS

    1. Bruce Chapman & Andrew Leigh, 2009. "Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 276-289, September.
    2. Barr, Nicholas, 2001. "The Welfare State as Piggy Bank: Information, Risk, Uncertainty, and the Role of the State," OUP Catalogue, Oxford University Press, number 9780199246595, June.
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    More about this item


    paid parental leave; income contingent loans; public policy; industrial relations;

    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth

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