MICHAEL KEATING.- The Third Economic Response to the Coronavirus

The latest economic response to the coronavirus is the third economic package announced in less than three weeks. Clearly more should have been done earlier, but the structure and scale of the Government’s overall economic response now seems more commensurate with the size and impact of the economic shock.

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 per cent increase in budget outlays – a staggering reversal in the Government’s previous policy of fiscal restraint, which was distinguished by its meanness towards the poorest households.

This wage subsidy also dwarfs the 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 per cent of annual GDP.

The biggest impact of this fiscal response will be on next year’s 2020-21 budget where the cost of the total assistance will increase the budget deficit by about 6¼ per cent of GDP in that year.

The scale of this fiscal response now seems to broadly match the size of the likely economic impact of the coronavirus, as before this package, GDP was forecast to be about 6 per cent lower next year. Certainly the impact on employment so far has probably been a reduction of around 6 per cent, but hopefully this new wage subsidy will help to stop unemployment rising further, and some people may even regain their jobs (see more below).

Also 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 able to afford its budget going deeper into deficit. Thus in 2019 the ratio of public debt to GDP in Australia was only 41 per cent, compared to more than 100 per cent in both the UK and US. In addition, with the present very low interest rates, the cost of servicing this increase in Australian government debt will be low.

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 a substantial and lasting deterioration in the budget, as well as resulting in much more misery.

The Structure of the response

As the Government has always insisted, the nature of the present economic shock is different to 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 impacting both the demand and the supply sides of the economy. Indeed, the longer 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 the demand and supply sides of the economy.

The Government’s second economic response package was mainly directed to 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 providing their 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 if they wish.

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 both 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 it has now bowed to the 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 per cent, and a 50 per cent reduction in turnover will apply for businesses which normally have a more than $1 billion turnover. Thus the wage subsidy will only flow to businesses that have been severely impacted by the coronavirus, unlike in some other countries.

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 employees who worked part-time this subsidy could even represent an increase in their 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 will also be more highly skilled, and often their skills are 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 in getting employers to re-engage workers who have lost their jobs, however, is less certain.

It will be most interesting to see how some of the big firm, such as Qantas and Myers, respond, and whether they will re-engage employees that have been laid-off. But even if a business is employing more staff than it needs, it could use this subsidy to support more time in training and up skilling, so that its capacity is ready to go when the health crisis finally ends.

The 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 sized 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. The 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 both 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 in a major way the Government could do at this juncture to support the Australian economy. No doubt there will be a need for further fine tuning as the situation evolves, but further major policy shifts seem unlikely.

But equally that said, I doubt that 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 much more radical reform agenda aimed principally at supporting a stronger and more egalitarian increase in incomes.

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.


Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

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3 Responses to MICHAEL KEATING.- The Third Economic Response to the Coronavirus

  1. Richard Ure says:

    When a person loses his job or income overnight, the first thing he thinks about is food and accommodation. Given its proportion of the household budget and the amount spent on rent in the total economy, it is disappointing to see the word “rent” mentioned once in a 1400 word article. Since real estate related costs (excluding interest) can consume as much as 50% of the gross rent and more, thanks largely to the burden of land tax, the problem is not addressed by putting NO EVICTION signs across the nation. A “solution” has been promised for weeks.

    Despite all the other pressures on government, both the learned author and the PM think unravelling years of employment law and creating Centrelink 2.0 for income support administration is the priority to “keep employers and employers together”. In the vast majority of cases, the parties would want this to happen anyway. An alternative would be to change redundancy provisions so that accrued entitlements are preserved but their payment due date is deferred until, say, three months after a date prescribed as Recovery Day. If that job still exists and the employee returns to his old job, the obligation continues to accrue, otherwise, it is paid out. In the meantime, stay in touch with WhatsApp.

    With the banks playing ball on interest payment and loan repayment deferrals, a substantial class of landlords could be prepared to defer, but not forgive, rent if they were satisfied the credit risk on payment of arrears was covered by someone with deeper pockets. The federal government could provide such a guarantee for whatever (realistic) deal is agreed between the landlord and tenant while having the mechanism to recover any default in the tenant’s obligations through the tax/HECS/benefits system or similar.

    An outstanding debt for back rent owing to the government would obviate much of the need for clumsy mutual obligation enforcement while encouraging tenants to keep the arrears as low as possible knowing the government has easily enforceable tools to collect in the long run.

    For existing tenancies, this is cheaper for the government than any generally available rent assistance program. This arrangement could be administered with the assistance of managing agents who would then be providing an essential service.

  2. Kevin Bain says:

    The omission from the wage subsidy scheme of over 1 million temporary visa workers, including asylum seekers and international students, is a major problem. Most have no access to Centrelink, Medicare, and local networks who can ride them over. Quite apart from the negative signal of “use and discard” when we have moved so strongly towards temp foreign labour, we expect them to cooperate with the strict public health measures without “skin in the game.” Can’t afford such divisiveness in a crisis.

  3. Cameron Leckie says:

    If we assume that the Australian and global economies will return to protracted economic growth then the Government’s response makes sense. The debt taken on to keep the money flowing through the economy and supporting people’s daily needs will eventually be repaid as the economy recovers and grows. It is however this type of thinking which has landed us in the situation we now find ourselves in. When kicking the can down the road as we did after the GFC, you eventually reach the end of the road with nowhere left to go.

    If, as I argued on this site yesterday (as well as in April 2019), the global economy has reached the limits to growth and the long term prognosis for economies is contraction interspersed with periods of expansion until a new crisis hits (compared with what everyone alive today has experienced; economic expansion interspersed with irregular and short lived periods of contraction) then the Government’s response will be counterproductive over the longer term.

    The Government is of course in a bind; this is the ultimate ‘wicked problem’.

    Politically I don’t think the Government has much choice but to do what it has done as far as supporting jobs etc but we also need to start seriously discussing how we reorganise the economy noting that the era of growth is finito.

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