As the COVID-19 pandemic sweeps across the globe, shutting down countries and closing borders, the Australian Government had to quickly come to terms with the severity of the health crisis and the inevitability of an economic recession.
A series of economic measures has been announced since early March to mitigate the impact on the local economy and people’s lives. The usual May federal budget was delayed to 6 October 2020, while the uncertainty makes formulating reliable economic and fiscal estimates an impossible task. We outline the fiscal measures announced by the government so far and attempt to assess their effectiveness in this highly uncertain world.
First package—12 March
Total: $17.6 billion (0.9% of GDP)
| Measure | Cost $m |
|---|---|
| Increase the instant asset write off threshold from $30,000 to $150,000 and expand access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020. | 700 |
| Back business investment by providing a time limited 15-month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct an additional 50 per cent of the asset cost in the year of purchase. | 3,200 |
| Boost Cash Flow for Employers by up to $25,000 with a minimum payment of $2,000 for eligible small and medium-sized businesses. | 6,700 |
| Support small businesses to support the jobs of around 120,000 apprentices and trainees. | 1,300 |
| A one-off $750 stimulus payment to pensioners, social security, veteran and other income support recipients and eligible concession card holders. | 4,800 |
| Support those sectors, regions and communities that have been disproportionately affected by the economic impacts of the Coronavirus, including those heavily reliant on industries such as tourism, agriculture and education. | 1,000 |
Second package—22 March
Total: $46 billion (2.3% of GDP)
| Measure | Cost $m |
|---|---|
| $550 per fortnight to both existing and new recipients of the JobSeeker Payment, Youth Allowance jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit, paid for the next 6 months. | 14,100 |
| $750 payment to social security and veteran income support recipients and eligible concession card holders, except for those who will receive the Coronavirus supplement above. | 4,000 |
| Allow individuals in financial stress as a result of the Coronavirus to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21. | 1,200 |
| Reducing superannuation minimum drawdown requirements for account-based pensions and similar products by 50 per cent for 2019-20 and 2020-21. | N/A |
| Reducing social security deeming rates. | 876 |
| The Government is providing up to $100,000 to eligible small and medium sized businesses, and not‑for-profits (including charities) that employ people, with a minimum payment of $20,000. | 25,200 |
| Guarantee 50% of new loans issued by eligible lenders to SMEs. | N/A |
| Support for the aviation industry. | 715 |
Third package—30 March
Total: $130 billion (6.5% of GDP)
| Measure | Cost $m |
|---|---|
| Eligible employers (turnover<$1bn with reduction in revenue of 30% or more, turnover>$1bn with reduction in revenue of 50% or more) will receive payments of $1500 per fortnight per eligible employee for up to six months. | 130,000 |
| Temporarily relaxing the partner income test for JobSeeker Payment. | N/A |
Balance sheet support
Total: $125 billion
The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent. This facility is for at least $90 billion or approximately 4.5% of GDP.
The AOFM’s $15 billion investment capacity to invest in wholesale funding markets used by small ADIs and non-ADI lenders (0.8% of GDP). The government will guarantee up to $20 billion to support $40 billion in SME loans, as part of the second package announced on 22 March (1.0% of GDP).
Keeping the economy alive
The stimulus measures have been designed and announced quickly to address the current economic crisis. The size of the stimulus is substantial, revealing the potential negative impacts the Government assesses as likely to be felt across the economy.
The majority of the measures are aimed at sustaining businesses, keeping people in jobs and protecting the financially vulnerable. Getting money into people’s hands (through measures like the JobKeeper Payment and increased benefits payment) will help people pay rent and keep food on the table. Measures including guaranteeing SME loans and instant asset write-offs will hopefully keep the businesses viable or be in a stable to bounce back once the lockdowns are lifted.
However, pumping more money into an already blocked economic plumbing might not be enough to solve the problems. Given normal production and distribution of goods and services are being disrupted by the extensive lockdowns, simply having money in people’s hands might not be enough to combat both the supply and demand shocks.
While employees may maintain a level of safety net income, their spending will suffer, both as a result of weaker consumer confidence (e.g. not replacing a white good while fearing for job security) as well as an unavailability of what they would normally consume (e.g. movies, eating out).
While the economy remains in lockdown, people are only likely to consume the bare essentials: rent and mortgage payments, food and drinks, toilet paper (possibly in unreasonable quantities), keeping the kids occupied, and maintaining one’s sanity. The businesses and those employed by them in these sectors will do well during this time (e.g. supermarkets, pharmacists), as well as essential services such as healthcare, police and council services including garbage collection. But those outside these ‘essential’ services will continue to struggle for as long as the lockdown remains, and possibly even longer.
Maybe it’s also time the government acted more as a central planner and channelled the idle productive capacity in the economy towards projects that will employ and pay people. This would allow them to keep the lights on and use their collective expertise to increase the economy’s productive capacity in the long term.
Some examples I can think of include: constructing temporary hospitals to care for the potentially higher number of patients, re-purposing manufacturing facilities to make medical protective equipment or ventilators, investing in better communication infrastructure so more people can work from home effectively, rebuilding drought and bushfire-affected communities, providing online training to small town tourism operators and pub owners, and modernising the curriculum to prepare a future-ready workforce. Finally, what better time to think about diversifying the economy from mining and residential construction?
We can’t rely on China to save the day this time
Many Australians born in the 90s and later have never experienced a recession. In fact, we beat the Netherlands and hold the record of the longest economic expansion in the developed world. The last recession to hit our shores was the “recession we had to have” in 1990. Twenty years on, a recession now seems almost inevitable.
Call us the lucky country, but there is unlikely to be another massive infrastructure spending in China this time around, which on previous occasions has driven up demand for our coal and iron ore (like during the GFC). If anything, our reliance on China has meant the tourism and education sectors are taking a harder hit than many other countries. Those affected range from lobster farmers in WA, to luxury shops in Sydney and Melbourne, to struggling higher education providers.
As global borders are closed and trade and tourism take a massive hit, countries are also in a mad scramble to get their hands on surgical masks and other protective equipment, some re-engineering production lines to make masks instead of clothing. It’s looking increasingly likely the last few decades of globalisation might start to unwind once we come out of this health crisis. Maybe it’s time to implement some long overdue structural reforms and set the economy up for the future.
For detailed measures and eligibility, see Treasury’s updated document on the economic response to the coronavirus.
