These are very uncertain times, but the Government seems to be playing catch-up, both with our health and the economy. In addition, there are continuing questions about the structure of the Government’s economic response and the effectiveness of some of the measures.
This latest package is the second economic response by the Government to the coronavirus in only ten days. However, I do not necessarily criticise the Government on this account. For the most part, it is a salutary reminder of just how uncertain the impact of the virus and the economic outlook is. Indeed, further stimulus may yet be needed as this pandemic and its economic impact evolves, not just in Australia but globally.
All round the world, the number of reported cases of people suffering from the Covid 19 virus has increased astronomically in the last week or so. Consequently, most governments have been forced to adjust both their health and economic responses. And as the Prime Minister has intimated, we may well need to further adjust our economic policies as events unfold.
The size of this second economic response
In Australia’s case, most of the commentary on the Government’s first economic response was that its size was about right, although there was some questioning of its structure.
That first response had an estimated total cost of $17.6 billion, or about 0.9 per cent of annual GDP. The magnitude of this package roughly matched the Treasury advice at the time that the dual impact of the bushfires and the coronavirus would have an impact on economic activity equivalent to 0.7 per cent of GDP.
By comparison, combining both the first and second economic responses, the Government now estimates the total cost of its economic response at $189 billion across the forward estimates, or 9.7 per cent of annual GDP.
However, two thirds of this estimated cost represent financial support (mostly by the Reserve Bank) and the fiscal cost of the Government support is only $63.8 billion, or a little over 3 per cent of annual GDP. This is less than President Trump’s fiscal package, currently before the US Congress, which is estimated to cost around 5 per cent of GDP, and it is also less than the New Zealand Government package costed at just over 4 per cent of GDP.
While it is arguable that the spread of the coronavirus may well be worse in the US, it seems unlikely that New Zealand has or will be as heavily impacted by the coronavirus as Australia. Yet so far New Zealand’s fiscal support for its economy is greater than Australia’s.
The Government cites Treasury advice that its total package, combining fiscal and credit support through the banking system, will increase growth in the June quarter by 2¾ per cent. But the net figure for GDP growth in the June quarter, after allowing for the negative impact of the coronavirus, is unknown.
I agree that the action taken by the Reserve Bank and the major commercial banks to support the access to credit by businesses will help those businesses to survive and it will also help ensure the overall stability of our financial system. But apart from maintaining access to credit and the stability of the financial system, I think that realistically we have reached the limits of monetary policy.
Interest rates are now at rock bottom, and while quantitative easing to expand the money supply may be necessary in some countries to preserve the stability of their financial systems, I question the need and impact of quantitative easing here in Australia. Instead, this form of monetary policy strikes me as a desperation measure when nothing else is available, and I fear that here in Australia quantitative easing will mainly further encourage the over-valuation of asset prices and add to wealth inequality.
In short, Australia should be relying mainly on fiscal policy to support the economy, and it is just as well that the Government accepts that it may well need to do more. But personally, given the balance of risks, I would have preferred the Government to err on the side of going hard and early.
The effectiveness of the measures
Quite properly, in my opinion, the thrust of the Government’s economic response is to provide support for (i) individuals and householders and (ii) businesses.
Support for individuals and households
Almost all the support for individuals and householder is very much targeted at low income people who qualify for social security assistance.
The outstanding new measure in this package is the new coronavirus supplement which will double the amount of income support for jobseekers over the next six months. In addition, the access to this assistance has been made easier, and recipients will not have to wait before they get financial help.
For a single person who is unemployed this higher payment is the equivalent to working for full-time for a little over $14 per hour. This is significantly less than the minimum wage, and so newly unemployed people are still going to have to tighten their budgets or draw down on their assets or go deeper into debt.
Furthermore, the income testing remains tough, and it is likely that a lot of workers whose working hours are cut, but who still remain employed, will experience a significant loss of income. That will also impact on the economy.
The Government, however, proposes to allow people receiving the coronavirus supplement or whose incomes have fallen by 20 per cent, to access up to $10,000 of their superannuation balances both this financial year and next. That might help tide some of these people over who are working shorter hours, and it seems likely that there will be many such workers who experience a significant loss of income, while still remaining employed.
Support for businesses
As stated above, the actions taken by the Reserve Bank and the commercial banks to maintain business credit are important in ensuring the financial stability of firms so that they can keep trading.
But the most important fiscal support for business in this economic response is what the Government is calling “Boosting cash flow for Employers payments”. Under this measure eligible employers that withhold tax to the ATO on their employees’ salary and wages will receive a payment equal to 100 per cent of the amount withheld, up to a maximum payment of $50,000. In addition, eligible employers that pay salaries and wages will receive a minimum payment of $10,000, even if they are not required to withhold tax.
The Government has argued that this payment, which is tied to wages paid, will act as a wage subsidy and therefore help sustain employment. My estimate is that the return to the employer for an employee on median earnings would amount to around $3000 per quarter. Consequently, the maximum payment of $50,000 would cover up to 16 to 17 such employees with median earnings.
However, the wage of a median wage earner is a little over $15,000 a quarter, so the wage subsidy is only around 20 per cent on average. Whether this will be enough to maintain employment in quite a lot of industries seems doubtful.
For example, now that people are required not to mix in large groups, then the custom for services, such as such as tourism, hospitality, entertainment (including sport) and retail trade (other than food and groceries), is likely to dry up. In these industries, if there is no market for a firm’s product, it is unlikely to want to increase its debt, by continuing to produce in line with its capacity and keep all its employees on. Instead, such a firm is likely to scale back its production and its employment.
Indeed, as we have seen with the airline industry when demand falls, they are not likely to maintain employment. Thus, only a couple of days after airlines received $715 million relief from a range of taxes and Government charges, Qantas announced that it was standing down 20,000 employees.
For similar reasons I think increasing the instant asset write-off announced in the previous economic response is a waste of money. It will reduce firms’ tax liabilities, but so long as there is no demand, this reduction in tax will not lead to more investment. And while the time-limited incentive to invest, does provide an incentive to bring investment forward, I doubt that it will have much impact for the same reason.
In sum, although it is heartening that the Government acknowledges that it may need to do more, its economic response continues to risk doing too little too late.
Furthermore, I think that in future there will need to be a much more targeted approach to industry assistance.
So far the Government seems to pride itself that it is using existing mechanisms which can be scaled up as necessary. But the reality is that the economic impact of the coronavirus will hit some industries and types of employment much more heavily than others.
We need to think much more creatively about how to target wage subsidies so that they increase with the decline in a firm’s revenue, and possibly provide a relatively greater subsidy to l0wer-paid employees whose jobs are at greater risk.
In this context, it would also be good to consider how the Government could facilitate the introduction of income-contingent loans. These loans would only be repaid when the recipient could afford to, while the requirement for repayments (rather than grants) would help ensure that the money went where it would genuinely help sustain future productive capacity.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.