A cavalier attitude of too many young people towards COVID-19, on display on warm Sydney days at Bondi Beach last week, has forced the hand of governments to close down large parts of the Australian economy. Tourism, travel, hospitality, leisure centres and many more industries are effectively shut down. The Federal Government’s second economic response package is both timely and welcome. But no government can keep such a big slab of the economy in hibernation indefinitely. Affected businesses will soon be asking how long they can last. We need to be able to bring them out of hibernation before too long.
Yet many medical experts overseas are claiming it will take 12 to 18 months to develop a vaccine, arguing in Britain that lockdowns should persist for that period In the western world, the accepted philosophy is to “flatten the curve” of infections so that the hospital system can cope with the expected influx of very ill patients pending the availability of a vaccine. This does not seem to be the approach being taken in Mainland China, Hong Kong and Singapore, which experienced the SARS epidemic, where strict lockdowns appear to be designed to strangle the spread of the virus not simply delay it.
In Australia, small and medium-sized businesses will be buoyed by the size and timeliness of the Morrison Government’s second economic response package. A bean-counting approach would have attached lots of conditions for eligibility, but the Government seems to have accepted the advice to go early and go hard. By making cash payments to employing SMEs, the Government is seeking to keep businesses connected to the economy and employees connected to their businesses.
Maintaining these connections is vital to the task of minimising economic destruction through the crisis – in the hope the economic downturn will look more like a ‘V’ than a ‘U’ or worse, an ‘L.’ For this approach to work, the shut downs cannot remain in place indefinitely; business owners need hope that they will be able to wake from hibernation and resume their activities. And while the cash payments to SMEs span two quarters, the initiative will need to be extended if the shut downs continue for longer than that.
That’s one reason why the Government has already foreshadowed a third set of measures. Indeed, a further category of businesses that will need attention is those with a turnover of more than $50 million per annum but which are not big businesses. Yes, $50 million seems a large turnover, but many such businesses operate on large volumes with small margins. Think, for example, travel agents selling holiday packages incorporating air fares and accommodation. The price of a 10-day holiday package might be high, but the margin earned by the agent is likely to be small. And yet the agent is likely to have quite a few staff.
Perhaps the Government didn’t get to this category of businesses in the second package because it cannot do everything at once, or it might have been concerned about criticism it was looking after businesses that didn’t really need it. But employees in these businesses are just as deserving of support to stay in work as those in small businesses. The destruction of these businesses would be no less damaging than that of smaller counterparts.
Before too long, a discussion will need to be had as to who is going to pay for these packages. From the time of the Global Financial Crisis private sectors around the world have been accumulating debt. Globally, corporate debt levels are high. Authorities worry about zombie companies, neither dead nor alive, kept in existence by debt but too heavily indebted to finance new, productivity-raising investments.
Here in Australia, households are among the most heavily indebted in the world. By international standards, the Australian government is not heavily indebted, so it makes sense for it to roll out response and recovery packages. But if the government debt were to be paid for by raising taxes after the crisis is over, consumers and businesses would be obliged to pull back on their spending, thereby slowing the recovery and keeping more Australians unemployed for longer.
The Reserve Bank has now embraced unconventional monetary policy in some form of quantitative easing, injecting cash into the economy to buoy private lending and consumer spending. By the time the crisis has ended, the Australian Government might need to consider issuing much longer-term debt to spread the load of recovery across generations or, in a world of inadequate spending relative to savings, print money to fund future productivity-raising investment. These would be unconventional measures, but we will be living in unconventional times for the foreseeable future.
In any event, that conversation can wait. The imperative now remains to get the financial support for businesses, their workers and Australians on income support as quickly as possible. On that score, the Morrison Government’s second economic response package is a good effort.
Craig Emerson is CEO of Craig Emerson Economics, a Distinguished Fellow at the ANU, Adjunct Professor at Victoria University’s College of Business and Director of the APEC Study Centre at RMIT. He was Minister for Small Business and the Service Economy in the Rudd Government during the Global Financial Crisis.