Prime Minister Scott Morrison announced a $17.6 billion stimulus package on March 12, aimed at combating the expected economic slowdown resulting from the growing COVID-19 pandemic.
This was followed four days later with statements that his cabinet was considering other stimulus measures, particularly targeting the tourism and hospitality sector.
The federal government’s priority is to pump money into small and medium businesses to encourage them to buy small capital goods. It claims this will boost spending and thus slow or reverse the slowdown.
This appears extremely unlikely, however, because the stimulus package is insufficient and poorly conceived.
The Australia Institute (TAI) argues the package is the right size but wrong shape.
TAI senior economist Matt Grudnoff said only 25% of the package — the part aimed at welfare recipients — is well directed, as those individuals would likely spend the money directly.
He argued small businesses are unlikely to spend in the current circumstances and that “instant asset write-off and accelerated depreciation initiatives are likely to be under-subscribed”.
People on welfare will most likely quickly spend the one-off $750 cash payment in the stimulus package because welfare payments are already well below the poverty line.
Rather than giving out a one-off payment that is roughly equivalent to $15 a week across the year, the economy would be better off if all welfare payments were raised to at least the poverty line.
But the slowdown is not primarily driven by a lack of domestic spending, nor is this likely to become the main driver. The key issue is the economy grinding to a halt as people become sick or are unable to work.
The stimulus is unlikely to stop a downturn as the need for social distancing and self-isolation over the course of the pandemic means a slowdown is most likely inevitable.
During this time, many businesses will close, and some may never reopen. This will be a tragedy for the owners and tens of thousands of workers who face loss of income — and, potentially, their livelihoods.
Protecting incomes must be a priority of the stimulus package.
This does not mean businesses must stay open during the pandemic. Many will need to temporarily close.
Only workplaces providing food, power, water, health and other vital services should remain open. All energy must be directed to ensuring this is possible.
All other workers, including casuals, should be paid leave during periods of self-isolation, sickness and shutdown. Large businesses should wear the cost of temporary closure or reduced services, while small and medium businesses should be supported to ensure they can pay workers and meet other essential costs.
This support should extend to sole traders, such as many tradespeople, artists, gig economy workers, musicians, performers and sex workers. Failure to do so will mean any resulting financial crisis will be much larger, and more deeply and longer felt, than need be.
There have been calls for a moratorium on rent and mortgage payment. While such a move has understandable appeal, there are some issues with it.
For one, it would simply shift the problem to another part of the economy and create the possibility of a contagion of bad loans in the financial system.
Moreover, most Australians do not have savings and are already reliant on short-term credit to cover not just rent and mortgages but food and basic services. As such, the priority has to be on maintaining incomes, rather than attempting to offset the consequences of their collapse.
The federal government has made much of the fact that its initial stimulus package was a consequence of its “sound economic management”. The reality is the budget surplus only ever existed on paper and was primarily premised on huge underspending on the National Disability Insurance Scheme.
However, we should avoid some of the gloating that has crept into public discourse around the evaporation of the “surplus”, as it accepts the notion that a surplus is inherently positive or represents “good economic management”. It risks celebrating the government’s attempt to provide certainty to global lenders rather than the provision of vital social services.
Large-scale subsidisation of incomes across the economy will cost a small fortune. In the short-term, it will need to be paid by government revenue and borrowing, which is relatively cheap in the circumstances. Covering the cost in the medium- to long-term will require raising government revenue.
As the economy restarts, the focus will have to be on ensuring the rich pay taxes, not just by cracking down on tax minimisation and avoidance schemes, but by raising corporate taxes.