The Coalition has abandoned its decade-long hostility to fiscal stimulus, today revealing a substantial economic package designed to preserve jobs and stimulate demand. Unlike 2008-09, however, there’s a real question about whether Australians will respond with confidence and keep the economy moving.
Just days after heavy backgrounding of the media that the package would be less than $10 billion and be targeted only at coronavirus-affected sectors, Scott Morrison has announced a package nearly twice that size including cash handouts to welfare recipients, direct cash assistance to small business and a wage subsidy scheme aimed at encouraging the retention of apprentices.
A key component will be a cash payment to businesses up to $50 million in turnover of up to $25,000, based on the amount of tax they withhold. That will cost nearly $7 billion.
Existing asset write-off provisions will also be dramatically expanded until June 30, with businesses up to half a billion in turnover being allowed to instantly write off new assets of up to $150,000, a measure designed to inject $700 million into the economy in the June quarter. There will also be $3.2 billion depreciation deduction to encourage investment until mid-2021 for businesses with a turnover of less than $500 million.
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The apprentice wage subsidy scheme will continue until September and will be backdated to January.
Crucially, welfare recipients will also receive a $750 cash handout at a cost of $4.8 billion. Recipients will include those on the age pension, Commonwealth senior health card-holders and Newstart, the disability support pension, those receiving the carers’ allowance and youth allowance, veterans on support payments and those receiving Family Tax Benefits. The current “waiting period” for people seeking to access the sickness allowance for casuals will also be waived.
The decision flies directly in the face of years of Coalition criticism of the Rudd-Swan government’s stimulus efforts, and recent, inaccurate attacks on Labor for “sending cheques to dead people”.
At $17.6 billion, the package is less than 1% of annual GDP. However, $11 billion is designed to be delivered by June 30, so it is more appropriately seen as around 2.3% of quarterly GDP. Moreover, some additional funding of around $5 billion will continue across the next two financial years, bringing the total size to nearly $23 billion.
While later than it should have been, the package represents a solid first step in what might well turn out to be a multi-stage economic stabilisation project, with the next major step being the budget in May. That will provide a mechanism for more substantial measures if the crisis shows no sign of abating. Big business is still pushing for a permanent investment allowance along the lines of that proposed by Labor at the last election at a cost of $1.8 billion a year.
Unlike 2008-09, however, the government’s stimulus package will enter an economy already weakened by years of wage stagnation and flatlining business investment as a result of government policies, with consumer confidence shot and activity in major sectors like retail, construction and manufacturing at near-recession levels even before the summer from hell and the virus crisis.
The level of trust in government generally, and the Morrison government in particular, is also very different to the record levels of popularity enjoyed by the Rudd government in its first two years.
The package will also reach the economy while key contractionary forces are still at work: there looks to be no end in sight to the rolling impact on economic activity of the virus, with the significant possibility of a dramatic step-up in “social distancing” measures.
These will both have a direct negative effect on businesses affected by shutdowns, and secondary effects such as people having to alter work arrangements to look after children unable to go to childcare or school.
In contrast, the Rudd government’s initial $10.4 billion stimulus — which was about 3% of that quarter’s GDP — was delivered as it and other governments were taking radical and decisive action to halt the financial crisis and restore confidence to banks and the financial system.
Morrison’s package may thus end up being swamped by bad news, especially if the international virus situation deteriorates badly and a global recession sets in.
Nonetheless, the government has at least indicated it is willing to throw off the shackles of ideology and a history of partisan criticism to take a first step toward protecting jobs and keeping an ailing economy ticking over.