By: Anton Mifsud, Victor Yan and Lucinda Chen
Domestic economic climate
With forecasted unemployment to reach 10% in Q3, GDP growth at -5% in Q2 and production in multiple sectors reaching -10%, the government’s ‘Job Keeper’ package comes as a desperate attempt to keep people employed and prevent a further spiralling of the economy. Indeed, Westpac chief economist Bill Evans stated that unemployment could have peaked at 17% had it not been for the Job Keeper package which “has been a game-changer for employment and the unemployment rate”.
Overview of the latest government legislation
While the government also announced a ‘Job Seeker’ package which is more-or-less a rebranding of NewStart, the ‘Job Keeper’ package works by the government subsidizing a $1500 a fortnight, pre-tax payment to workers. Depending on the number of eligible workers (workers who have been essentially let go but still on the books), the government will send a sum of money to the employer who is expected to pass on at least the full $1500 payment. As Josh Frydenberg said, “Businesses will close and people will lose their jobs. That is why we have doubled the welfare safety net”.
With up to 6 million Australians set to benefit and 730,000 businesses already registered with the Australian Taxation Office (ATO) for access to the scheme as of Thursday 9/04, this $130 billion initiative is the single largest piece of government spending in Australian history.
The size, scale and breadth of this legislation is unparalleled in Australian policy history and is based on economic intuition.
Demand-side economics behind Job Keeper
In Australia, consumption makes up around 60% of GDP. There is a well-known positive and stable relationship between household wealth and consumption which is what the government is targeting to ensure economic stability. Even though the data is slightly out-dated, the patterns highlighted in Graph 2 are consistent with the idea that strong growth in household wealth supports consumption growth.
Sources: Australian Bureau of Statistics; Reserve Bank of Australia
There are likely two effects the government seeks to achieve on the demand side. The first is simply by increasing or maintaining consumer spending via cash injections to households. Here, the economy is being stimulated as money will be injected into the economy. In times where business confidence and retail spending are at extreme lows, having money flow through the economy will help boost income for all.
Secondly, the wage subsidy is attempting to improve the wealth effect of individuals. Having a stable income will boost the optimism of individual consumers who will more likely choose to spend their income rather than save it. The government is aware that confidence in an extremely pessimistic market is important. For example, the ASX had the largest gain in over 40 years while two weeks ago had the fastest fall since the Great Depression. Such volatility and uncertainty not only reflects the disagreement between policy and the effects of COVID-19 on the economy, but also could be devastating if such volatility occurs in the housing market. Therefore, in subsidising wages, the government is hoping that the general population will begin to become more optimistic in order to prevent further devastating consequences on the economy and financial markets.
Supply-side economics behind Job Keeper
Not only has COVID19 affected demand-side factors of the economy, but also supply-side factors that were not nearly as prevalent during the GFC. It is not difficult to see the supply shortages in the economy- stemming from long-life foods like canned vegetables and fruits, dry pastas and noodles, flour, sugar, hand sanitiser and medical-grade surgical masks. Given our globalised economy, we rely on other countries and their comparative advantages to produce these goods. However, the present situation is that domestic countries are unable to produce certain goods, and normally, Australia would import these goods. However, due to the global impact of the virus, firms overseas who Australia would normally import from are forced to close due to government restrictions triggering supply shortages in all industries and fuelling panic.
Differing viewpoints on the effect of Job Keeper
Even though the ASX had its largest daily gain in history after the announcement of the Job Keeper package, some are concerned about the very appeal to this legislation- the scale and amount of people it reaches. The package is highly demanding on the public purse, costing almost 10% of GDP with an estimated cost of 3.3% of GDP this budget year and 6.1% the next year. For comparison, the Rudd and Gillard governments spent $51 billion during the GFC which was mainly spent within the year, not within 6 months like Job Keeper. The below visually highlights the spending on this package which equates to $7600 per person.
Finally, there have also been some more moral arguments to the legislation which does not distinguish between those who will receive a pay rise from this scheme and those who have to take a serious pay cut. It is illegal for businesses not to pass the wage subsidy on in full to employees irrespective of what their previous weekly salary was.
Some argue – like Raja Junankar, an economics professor at the University of New South Wales, that going into debt to facilitate this package is worthwhile to prevent a recession. However, as our triple-A credit rating deteriorates, the big question becomes: How many more times can Australia bail out individuals and businesses?
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a professional before making investment decisions based off of this article.