A Productivity Commission report, released on Wednesday, urged fully funding childcare for families earning up to $80,000, as well as households with multiple children under five that earn less than $140,000.
Asked if he wanted to deliver universal childcare, Prime Minister Anthony Albanese said he wanted it to be available.
The report also called for an activity test for parents to receive the childcare subsidy to be dumped, with the commission forecasting early childhood attendance would increase by 10 per cent.
Opposition Leader Peter Dutton said support had to be given in a "structured way" that doesn't drive up taxes or impact economic competitiveness.
"Ultimately activity testing is about ensuring that places and funding are going to people who are working, looking for work or studying, not people who don't need those places," he told reporters.
Treasurer Jim Chalmers said Labor was yet to commit to making universal childcare an election pledge.
Australian Childcare Alliance vice president Nesha Hutchinson said the report set out the path for significant steps forward for the industry.
"Historically, changes to funding have sometimes had unintended consequences so we welcome recommendations for a considered and evidence-based approach which delivers the best outcomes for every dollar spent," she said.
"Working through all of the recommendations will take time, to ensure long-term successful outcomes."
Early Childhood Minister Anne Aly said while the reforms would cost government $17 billion a year, there would be long-term benefits.
Early Childhood Minister Anne Aly says funding for childcare is an investment in young Australians. (Dave Hunt/AAP PHOTOS)
"This government from the first day we took office has always looked at early childhood education and care as an investment in our youngest Australians and we embarked on a process of reform," she said.
The report said the childcare changes would add 143,000 full-time workers to the jobs market.
But research economist at the e61 Institute Erin Clarke said the proposed reform would not increase female workforce participation.
"The impact of cheaper childcare on women's work is not as straightforward as one may think," she said.
"Increasing childcare subsidies for low-to-middle income households may not on its own be sufficient to encourage mothers to increase their labour supply."
Early childhood organisation Thrive By Five's director Jay Weatherill said the report had backed a vision of universal childcare.
"We are calling on the government to legally enshrine an entitlement to early learning, and introduce a $10-a-day cap on out-of-pocket fees," he said.
"Without this, the cost to parents will continue to skyrocket, and too many children and families will continue to miss out."
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