The Australian government has announced a third, and far and away biggest, fiscal stimulus package to protect the economy from coronavirus driven shutdowns
30 March 2020 | Shane Oliver, AMP Capital (IMAGE: Joshua Hoehne)
Prime Minister Scott Morrison has announced the nation’s biggest ever stimulus package, its third and far away biggest tranche of measures to support Australia’s COVID-19-hit economy.
Unveiling the plan in Canberra, he says, “We are committing $130 billion over the next six months to support the jobs and livelihoods of what we anticipate are being almost six million Australians, who will need that lifeline in the months ahead.”
The package
The details in terms of the total package, and its costings, are a bit sketchy at this stage, but the main elements are as follows.
The key aspect of the new package is a generous wage subsidy program under which the Federal Government will pay a flat fortnightly JobKeeker wage subsidy of $1500 per worker to businesses that see a 30% or greater reduction in revenue (or 50% reduction for firms with sales above $1bn) from 30 March for up to six months.
The subsidy comes with the obligation for the business to pass the payment on to their employees and to keep them on their books. The payments will also apply to sole traders and casuals that have been with the employer for 12 months. And it applies to employees that have been stood down since 1 March and would replace any JobSeeker payment that an employee may have since applied for if their employer agrees to accept the wage subsidy.
The $1500 fortnightly wage subsidy is about 70% of the median wage but about 100% of the median wage in industries like hospitality and retail that are being heavily hit by coronavirus shutdowns.
It’s a far preferable approach to relying on supporting incomes via enhanced unemployment benefits through CentreLink/Services Australia as it keeps people employed, takes pressure off businesses, takes pressure off CentreLink, minimizes a confidence zapping surge in unemployment and keeps workers connected to their employer which will aid a speedier start-up of businesses and the economy once the virus is under control.
The Government has also announced that the partner income threshold for receiving JobSeeker payments will be increased from $48,000 to $80,000.
Total stimulus now 10% of GDP
The $130bn estimate cost of the wage subsidy will be partly offset by reduced access to unemployment benefits, but it will still take total Federal budgetary and state budgetary measures to protect and ultimately stimulate the economy to around $200bn, or a whopping 10% of GDP. This of course is before allowing for Federal Government loan guarantees and cheap RBA funding for the banks, which bring total fiscal and monetary support to around 16% of GDP.
This fiscal stimulus will now swamp that seen at the time of the Global Financial Crisis.
This is necessary given that the threat to economic activity is bigger than anything seen in the whole post World War Two period with a potential hit to June quarter GDP of 10% or so.
The latest stimulus package takes Australia to the high end of coronavirus stimulus moves globally, when measured as a share of GDP for each country for the year ahead. Recall that the latest US stimulus move took US budgetary easing (excluding loans) to around 6-7% of US GDP.
More stimulus may still be needed, including as the focus eventually moves from protecting the economy to boosting a recovery once the virus is brought under control. This may take the form of direct cash handouts to Australian households.
Australia is still heading towards recession
It’s unlikely that fiscal stimulus will be able to keep Australia out of recession over March/June quarters. It won’t stop the virus and it won’t boost spending when people are locked up inside such that they can’t spend as they usually do. But it will help protect the economy from collateral damage by minimising business failures and household defaults and it will help the economy bounce back when the time comes to emerge from “hibernation”.
The Australian share market rose 7 percent today, its best gain in 40 years.
It’s increasingly looking like policy moves in Australia including those by the RBA, states and Federal Government may be starting to get the upper hand in terms are tipping the risk scales away from some sort of long depression/recession towards the prospect of a decent rebound in growth once the virus is brought under control particularly as the support measures help minimise the collateral damage to the economy allowing the bulk of it to hibernate rather than die through the shutdown.
Budget surplus an ever distant memory
Ever bigger fiscal measures to deal with the coronavirus shock will clearly add dramatically to the budget deficit – by around $200 billion over the next year and to this needs to be added the hit to public revenue from the economic downturn. But this is necessary.
If the Government doesn’t provide significant support to match this could be a 10% or so hit to the economy then the economic downturn will be deeper and it will take much longer to recover which will ultimately result in an even bigger hit to the budget.
To borrow from classic Keynesian economics it makes sense for public sector to borrow from households and businesses at a time when they can’t spend due to the shutdowns and for the Government to spend to help smooth out the economy, and then of course reverse this once things go back to something more normal.
It should also be noted that Australia’s public debt is far lower than in other comparable countries and the cost of borrowing for the Federal Government right now is very low at just 0.75%. The budget blowout may risk a downgrade in Australia’s AAA sovereign debt rating, but ratings are a bit of a relative game and Australia’s public finances will still look relatively better than others.
And I would rather a rating downgrade than a deep depression/recession any day…particularly when any downgrade will have no impact on the Federal Government’s cost of borrowing!
