Posted 1 April 2020
The latest economic response to the coronavirus is the third economic package announced in less than three weeks. Clearly, more than this should have been done previously, but the structure and scale of the Government’s overall economic response now seems commensurate with the size and impact of the economic shock.
The scale of the fiscal response
The centrepiece of the latest economic package is the wage subsidy, at an estimated total cost of $130 billion. Even on its own, this wage subsidy represents an unheard-of 26 percent increase in budget outlays – a staggering reversal in the Government’s previous policy of fiscal restraint, distinguished by its meanness towards the poorest households.
This wage subsidy also dwarfs previous economic responses, accounting for as much as two thirds of the total $194 billion economic assistance provided through the Australian government budget. And this $194 billion for all economic assistance, in turn, represents just under 10 percent of annual GDP.
The biggest impact of this fiscal response will be on next year’s 2020-21 budget, in which the cost of the total assistance will increase the budget deficit by about 6¼ percent of GDP in that year.
The scale of this fiscal response now seems broadly to match the size of the likely economic impact of the coronavirus, since, before this package, GDP was forecast to be about 6 percent lower next year than this year. Certainly, the impact on employment so far has probably been a reduction of around 6 percent, but hopefully this new wage subsidy will help stop unemployment continuing to rise, and some people may even regain their jobs (see more below).
In addition, the scale of Australia’s fiscal response is now of the same order as the response adopted in other similar countries, such as the US and the UK. Australia is, however, much better than previously able to afford its budget deepening its deficit. Thus, in 2019, the ratio of public debt to GDP in Australia was only 41 percent, compared to more than 100 percent in the UK and the US. Further, with present very low interest rates, the cost will be low of servicing this increase in Australian government debt.
There may be some diehard fiscal conservatives who will worry about the size of this deterioration in the budget balance, but it is not permanent, as most of the measures are clearly temporary. Also, an enduring economic depression would equally result in substantial and lasting deterioration in the budget, as well as in greatly increased misery.
The structure of the response
As the Government has always insisted, the nature of the present economic shock is different from the Global Financial Crisis (GFC).
During the GFC, the then economic response properly concentrated on increasing economic demand, and in particular on increasing consumer demand, hence the emphasis on increasing assistance to households.
In contrast, the coronavirus is influencing both demand and supply sides of the economy. Indeed, the long run concern is that the supply side of the economy may suffer lasting damage, as businesses can no longer operate and disappear, while their workers lose their jobs and their skills atrophy through lack of use.
Accordingly, the Government’s overall economic response this time has been directed to sustaining both demand and supply sides of the economy.
The Government’s second economic response package was mainly directed at supporting households, and thereby demand. The principal feature of that package was a doubling of income support for unemployed people over the next six months.
In the latest package on Monday, the means test on a partner’s income for this support has been eased, so that provided a partner earns less than $3068 per fortnight, the couple’s joint income could be as high as $2000 per week. In addition, there are two lump sum payments of $750 to pensioners, and provision has been made for people to access up to $20,000 from their superannuation.
Overall, the Government’s assistance to households has maintained Australia’s particular egalitarian tradition, and has been highly targeted in favour of the most disadvantaged households.
The Government’s strategy to maintain the capability of businesses provides support for the two principal factors of production, labour and capital, which together determine the supply capacity of the economy.
In terms of cost, the most significant element of the overall response is the $130 billion wage subsidy. For a time, the government resisted this initiative, but has now bowed to combined lobbying by the Labor Opposition, business, and the trade unions.
This wage subsidy will provide a flat amount of $1500 per fortnight per employee for up to 6 months. Consistent with its name, the Jobkeeper Payment, its main purpose is to help businesses keep more than 6 million employees and self-employed persons in their jobs and ready to restart full production and sales when the crisis is over. As an aside, this payment will, of course, also help to sustain incomes and demand.
To be eligible for the Jobkeeper payment, businesses with a normal turnover of less than $1 billion must have suffered a reduction in their turnover of more than 30 percent, and a 50 percent reduction in turnover will apply for businesses which normally have more than $1 billion turnover. Thus, unlike in some other countries, the wage subsidy will only flow to businesses severely impacted by the coronavirus.
The industries most affected by the coronavirus typically employ relatively low-skilled workers, often part-time and on low rates of pay. A subsidy equivalent to $750 per week is more than someone on the minimum wage working full-time would expect to earn. For those part-time employees, this subsidy could even represent an increase in pay.
In the case of employees in eligible businesses who earn more than the wage subsidy, the employer may want to make up at least some of the difference in their pay. These employees who are more highly paid than those on the minimum wage will have additional skills often specific to the enterprise. They are therefore not readily replaced, and their employer has an extra incentive to keep them on the payroll.
The payment of this wage subsidy certainly provides encouragement to employers to keep their employees on their books. Whether it will succeed, however, in encouraging employers to reengage workers who have lost their jobs is less certain.
It will be most interesting to see the response of some of the big firms, such as Qantas and Myer, and whether they will reengage employees who have been laid-off. But, even if a business is employing more staff than it needs, it could use this subsidy to support additional training and upskilling, so that its capacity is ready to go when the health crisis finally ends.
Government support to businesses to sustain their capital during the health crisis is not primarily from the budget. Instead, the Government’s ‘hibernation strategy’ for business principally involves partnering with the banks to support lending to their customers, and the banks providing a six-month reprieve from having to make repayments. This has seen the government join with the banks to provide loans of up to $250,000, and the government is also providing cash payments of up to $100,000 to small and medium enterprises.
Finally, the government is working with the States to ensure that tenants suffering significant hardship as a result of the coronavirus, will have the security of a six-month moratorium on evictions. Landlords, who would then be receiving no rental payments, should not be severely disadvantaged, as they will be covered by the six-month reprieve from having to make loan repayments to their bank.
Taken together, these various measures to support labour and capital should go a long way towards sustaining the capacity of the Australian economy during the downturn, so that it can respond as and when demand increases after the health crisis.
Indeed, it is hard to think what more the Government could do in a major way at this juncture to support the Australian economy. No doubt, there will be a need for fine-tuning as the situation evolves, but further major policy shifts seem unlikely.
But, equally, I doubt the economy will ‘bounce back’, as the government often suggests. The fact is that the Australian economy was very sluggish before the advent of the coronavirus, and it will continue that way, unless the Government embraces a radical reform agenda, aimed principally at supporting a strong egalitarian increase in incomes.