Australian government pumps $18 billion into flagging economy

Prime Minister Scott Morrison announces a stimulus package that will take a significant bite out of the government’s promised budget surplus

With the likely prospect of Australia heading towards a recession, government targets small and medium sized business with coronavirus stimulus package

12 March 2020 | Marcus Reubenstein  

Australian Prime Minister Scott Morrison has announced $17.6 billion in spending and tax write off measures which, the government says, will benefit up to 6.5 million individuals and 3.5 million businesses.

The Prime Minister says, “Our plan will back Australian households with a stimulus payment to boost growth, bolster domestic confidence and consumption, reduce cash flow pressures for businesses and support new investments to lift productivity.

“Australia is not immune to the global coronavirus challenge but we have already taken steps to prepare for this looming international economic crisis.

“Just as we have acted decisively to protect the health of the Australian people, based on the best evidence and medical advice, our support package responds to the economic challenges presented by this pandemic in a timely, proportionate and targeted way.”  

The major details

  • A large $17.6bn direct stimulus package, a $2.4bn health package and hospital funding to the states and territories. Along with the ~$2bn drought and bushfire relief announced earlier this year total fiscal stimulus to the Australian economy over the next 15 months is worth just over 1% of GDP – which is a solid amount.
  • The key measures are targeted towards providing some cash flow relief to the economy as spending takes a hit including:
    • An increase in the instant asset write off threshold for small/medium sized businesses – this is done to boost business investment
    • Allowing higher depreciation deductions for small/medium sized businesses – also done to boost business investment
    • Tax-free cash payments to small/medium sized businesses  
    • Wage subsidy for employers of apprentices/trainees
    • One-off $750 payment to households who are on welfare payments and pensioners. This starts from 31 March and will go to 6.5 million households.
    • Setting up a specific fund to help regions and communities impacted by the Coronavirus – specifically education, tourism and agriculture providers.

The COVID-19 outbreak comes at a time when Australia is already faced with headwinds of soft economic growth over 2018-19, the drought and bushfires across late 2019 and early 2020.

Says AMP Capital Senior Economist, Diana Mousina, “The key question is: will this stimulus be enough to ward off an Australian recession? We think no.”

AMP’s data estimates lower Chinese tourist and education spending, along with the impact to the bushfires will see March Quarter GDP take a hit of 0.7%.  

According to Ms Mousina, “June quarter GDP growth will be impacted by the rest of world (ex-China) dealing with the coronavirus and we see a Eurozone and US recession also this year which will be another negative impact to Australian export growth.

“On top of that, any further outbreak of the virus domestically will slow spending broadly. The fiscal stimulus package will help in limiting the depth of the Australian recession and should help the unemployment from rising too far.”

Diana Mousina, AMP Capital

AMP Capital has charted GDP growth scenarios for Australia, its base case being a shallow recession in the March/June quarters before a sharp recovery in the second half of the year; and a worst case of a deeper recession with a slower recovery.

Economists are predicting Australia’s unemployment rate will be around 5.5% this year; only a slight rise on the current level of 5.3%.

However, with two million people – or around 17% of Australia’s workforce – employed casually, there is no guarantee their hours will not be cut.

This is a deep concern to Chinese Australians, many of whom have casual jobs working for small businesses.   

The Reserve Bank of Australia is still expected to cut the cash rate to 0.25% in April but today’s stimulus package might allow the RBA to wait a bit longer before implementing quantitative easing, which at this stage looks like it would be some sort of yield curve control method (where the RBA targets a specific level of bond yields).

The Federal Opposition was predictably muted in its response, with Labor leader, Anthony Albanese saying, “Labor’s priority is keeping workers in their jobs and businesses afloat. We’ll be constructive.”

Albanese adding, “The inescapable fact today is the economy was floundering long before coronavirus. Wages are going nowhere and families are struggling – all on this complacent government’s watch.”