In short – covid has been the greatest political mismanagement saga in our history.
The simple fact is that this covid cannot be contained and never will be. Simply let it run its course than the pretence of “doing something” and screwing up the entire country. Scott Morrison telling us how good things are getting. Victoria is a disaster area and NSW about to be the same. The rest of Australia will follow very soon. A second total lock down is coming. Daniel Andrews has really made a dogs dinner of Victoria wanting to be the shining light of multiculturalism and a sanctuary state. Then demands other states take their “fair share” of refugees. Why? Is this guy really that stupid that he cannot see why everyone cannot share his “vision”? NSW has just indicated that this state may go into total lock down again. All different signals depending who you listen to.
How hard will the reductions in JobKeeper and JobSeeker hit consumption, and will they deepen the COVID recession — or at least slow the recovery?
Those are the big questions posed by the revised wages subsidies and income support measures announced by the Prime Minister and the Treasurer.
The key assumption behind the decision to mount a staged reduction in the wages subsidies that have supported nearly a million businesses and 3.5 million workers since March, and the substantially increased benefits for the unemployed, is that during the coming months there will be more work available.
It was the Prime Minister’s constant theme in announcing the new measures.
That there will be more jobs and more income for businesses and workers “as the economy improves”.
That businesses will be in a position to pay workers more, supplementing JobKeeper, as demand climbs.
That people cast out of work by the COVID recession will be able to pick up at least some paid employment to supplement their heavily reduced JobSeeker payments.
Yet the lessons of history raise nagging doubts.
The COVID contraction
In the aftermath of early 1990s recession in Australia, the last downturn before this one, the unemployment rate continued to rise after the economy began growing.
From a peak of nearly 11 per cent, the jobless rate did not return on a sustained basis to pre-recession levels until the next decade.
Granted, this is a recession borne of very different circumstances, and the patterns may well differ.
But it is also a far deeper downturn. In the early 1990s, economic output shrank by just 1.4 per cent. The COVID contraction will be multiples of that.
Yet the Government’s estimates seem to assume a pretty rapid business bounce back.
It puts the cost of extending JobKeeper to the end of March at about $16 billion, and the extension to the JobSeeker supplement at about $3.8 billion.
Compare that to the $70 billion the Commonwealth outlayed on JobKeeper alone in phase one.
To qualify for continuing JobKeeper support, smaller businesses will have to show a continuing 30 per cent drop in revenue from pre-COVID levels and big businesses a 50 per cent fall.
Treasury’s estimates embody some optimistic assumptions about the number of businesses that will enjoy such a boost to income they will no longer be eligible for the wage subsidy.
An investment surge seems unlikely
Even if the economy does emerge from recession soon — a prospect which could be quashed if the renewed high rates of transmission in Victoria continue or spread — many economists struggle to see the basis for Treasury’s apparent optimism of a strong recovery.
GDP is made up of consumption, business investment, government expenditure and net exports.
International borders will almost certainly remain closed to most foreign tourists and many foreign students, hitting export income.
A surge in business investment seems unlikely amid the downturn and the uncertainty.
Consumption may recover somewhat if restrictions on economic activity sparked by the health crisis ease, but how much will the economic shock induce caution and deter people from spending?
There’s no talk of a ‘snap back’
That leaves Government — which is determined to wind back.
But the determination to wind back over the coming months will be tested if the private sector recovery it is anticipating does not materialise and reduced wages subsidies and job seeker payments curtail consumption.
Even if, somehow, we manage to conjure a strong recovery from the recession, the depth of the downturn means that there will be a long way to climb.
The talk of a “snap back” to business as usual has disappeared from the Prime Minister’s lexicon.
The metaphor of an economy that “hibernates” and then emerges full of vigour in the spring has fallen out of favour.
To some extent, the Government is caught between a rock and a hard place.
Our fiscal cliff has become a fiscal slope
As its own Treasury warns, there is a downside to the continuation of JobKeeper: “It keeps businesses afloat that would not be viable without ongoing support and keeps people tethered to jobs that are no longer viable”.
“Zombie firms” being supported by the wage subsidies will be exposed as the support is pared back.
A Zombie firm apocalypse may be a necessary part of any economic recovery, allowing resources to be reallocated to more productive areas, but it will add to the pain in the short-run.
The Government is trying to better target the JobKeeper payments by introducing a smaller wages subsidy for part-time workers, addressing an inadvertent outcome of the initial JobKeeper program that saw some people getting paid more in government wages subsidies than they were earning before the crisis.
That is a completely understandable revision, yet it could nevertheless strip spending out of the economy.
The “fiscal cliff “that many feared the economy would topple off if there was a hard withdrawal of JobKeeper and JobSeeker has been avoided.
But, in the words of veteran economist Shane Oliver, it’s been replaced by a “fiscal slope” — which could still be a pretty steep and rocky road.