March 24, 2020
As the crisis deepens the Commonwealth is escalating its response. The second stimulus package, worth $66.1 billion, adds to the first package of $17.6 billion. The latest effort provides grants to households and to businesses, supported by a round of tax and regulatory changes intended to help businesses weather the storm.
Temporary changes to bankruptcy rules are also included. The RBA is unleashing a separate set of efforts, intended to ensure continued functioning of the banking system and make it easy for businesses to borrow money. All told, the fiscal stimulus (meaning spending) part of the Government’s response sofar is equivalent to around 4% of Australia’s GDP.
The Committee for Sydney commends the scale and speed of the response. Government is fighting a war on two fronts – trying to control the spread of COVID-19 while at the same time trying to save people’s livelihoods. The tragic truth of the situation is that the measures that need to be taken to save lives will make the economic recession worse. But the counter-measures to protect the economy will make all the difference. So far, what we are seeing with regard to the economic response is generally on track.
The economic impact of this pandemic is not the same as a “normal” recession, if there is such a thing. In some respects, it resembles a natural disaster with people being forced to not work even where “demand” for their work remains high. In other respects, it’s like a war-time economy, with parts of the economy required to increase activity while consumption drops and normal business is disrupted.
Indeed, some economists are predicting that many countries will end up engaging in rationing, price controls, and direct government control over certain industries, like a wartime economy. Australia’s economic response, like every other country, will by necessity consist of a great deal of experimentation and trying new things.
During the period of “lockdown,” which Australia is entering later than other OECD countries, we need income support to allow households and businesses to survive. So far, this is what Government has focused on, we think correctly. However, it looks highly likely that further restrictions on movement and closure of businesses will be introduced shortly, as they have in other countries.
Moving forward, we would urge the Government to consider a more complete program to replace household income, via subsidies to business in exchange for keeping people on payroll. The UK has taken this approach, guaranteeing 80% of wages of workers across the economy. Denmark is replacing up to 75% of wages via a similar mechanism. Instead of sending a succession of small checks, a fully-scaled up program would restore confidence and avoid the recessionary cycle of households cutting expenses so drastically.
Gradually, attention will shift from income support to true economic recovery, where it may prove that more of the traditional tools of boosting aggregate demand start to work. This period, seemingly far away right now, will likely last longer than the lockdown, and how we grapple with recovery will have impacts for years to come. This is where public infrastructure projects, which the country will need in any case, along with more rapid approvals of private investments, can power Australia out of the recession.
As the Government moves through the crisis it will face difficult economic management questions: How to structure the rest of the income replacement package? How to allocate losses between investors, workers, and taxpayers? How deep into debt to go? When to shift focus to recovery and how to best deploy those dollars? And which of the non-spending measures – generally long-proposed reforms – to enact as a way to jump-start the economy?
The true economic impacts of this pandemic will depend on how successful Australia is with its public health measures – and this is the essential thing to focus on now.
The Committee for Sydney is working closely with all three tiers of Government to do everything possible to keep people employed and set the stage for the recovery.