Mere days after announcing a substantial stimulus package, the government is quickly working on another fiscal stimulus announcement, reflecting a clearer understanding that the virus crisis is going to inflict far more serious economic damage than we feared last week.
Central banks are doing their bit with emergency moves over the last seven days, but with interest rates already near zero, quantitative easing (pushing money into the economy) and asset purchasing is all they have.
It’s now over to governments to deploy fiscal policy to head off what could be a deep recession.
The government is hinting that the new package will be primarily aimed at supporting industries that are already being hammered by the crisis — aviation and tourism are the two big candidates, though the government committed $1 billion to help regional business, including tourism, last week.
As we saw with the previous package, however, the nature of the new package may well change dramatically and quickly as the crisis escalates. Policymakers, like the rest of us, are now in an hour-by-hour rather than day-by-day situation.
Given how quickly last week’s $18 billion package has been overtaken by events, the government faces the risk that even a substantially bigger package than that disappears without trace as businesses shutter, workers lose income, the death toll soars and, perhaps, the country locks down.
Today Alan Kohler in The Australian urged a truly massive package to stave off what now could well be a depression, let alone an inevitable recession.
He suggests, among other ideas, the government replace the majority of lost wages and salaries.
It sounds extraordinary but Kohler’s right: some sort of economy-wide wage subsidy or other form of direct assistance to employers may be necessary to prevent small and medium businesses sacking workers en masse as revenue dries up.
The unions will likely complain. The ACTU’s Sally McManus last week attacked the first package for giving too much money to businesses — where, she said, it would only “trickle down” to workers — and not enough to consumers.
But there’s a risk that consumers won’t spend it in the current panicked climate. Evidence gathered in 2012 by Andrew Leigh from the financial crisis suggests that Australians spent around 40% of their Rudd stimulus cheques and saved or paid down the mortgage with the rest.
Leigh used the House of Reps economics committee hearings to ask the Commonwealth Bank its view of how much last year’s tax rebates were spent, and it calculated around 29%.
Any new stimulus package involving cash payments to households is thus likely to see at least 60% banked rather than going into the economy to support jobs — and maybe more. So additional demand stimulus measures would need to be supplemented with more direct support for businesses to retain workers, or offset lost income for workers who lose their jobs.
The numbers involved quickly add up, yes.
The quarterly wages bill for Australian employers, not including the government-dominated health and education sectors, is currently around $127 billion, according to the ABS. Let’s consider, as an exercise the maximal case: the government offers to subsidise half the wage bill of all employers. That would be $65 billion a quarter.
Done for, say, two quarters, and maybe scaling down in the December quarter, would add around $150 billion to the budget deficit (split over two financial years), or around 7.5% of GDP.
That would push our net debt to 27% of GDP — almost certainly losing our triple-A credit rating, but still far below the level of a number of other countries. Japan’s level is around 150%, France 90%, the US 80% (and rapidly rising even before coronavirus), the UK over 70%, Germany over 40%.
We would even have some room for more stimulus if needed in the event of a global depression.
More plausibly, pausing all GST payments by business would cost around $15 billion a quarter, providing valuable cash flow to businesses, and only raising net debt to ~23% of GDP. Payroll taxes cost employers across the country around $25 billion a year; waiving them for twelve months would materially damage state government revenue but that could be made up for with Commonwealth borrowings. It would barely shift the dial on net debt.
Both of those measures would make a significant difference to employers — but only really work if businesses still have money coming in the door.
When the Rudd government sent the deficit soaring to over $50 billion, voters and commentators alike were shocked. We all had to adjust to a new order of magnitude in deficit spending in order to avoid a recession.
In 2020, we may have to do the same again and start thinking of deficits in twelve-digit sums if a depression is to be avoided.