Finance Consumer Low-income earners are propping up the economy during the recession

Low-income earners are propping up the economy during the recession

Low-income earners are shielding the economy.
Lower-income earners have insulated Australia's economy from the worst of the coronavirus fallout. Photo: The New Daily
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Low-income earners have propped up the economy during the coronavirus pandemic by opening their wallets, new data shows.

As the Prime Minister Scott Morrison pushed back against calls to extend the elevated JobSeeker rate beyond September, illion and AlphaBeta released transaction data showing low-income earners kept the economy moving during the height of the pandemic.

While high-income earners tightened their purse strings and “completely retreated” as the coronavirus swept through the country, people earning less than $65,000 a year did the opposite.

Immediately after the federal government’s Coronavirus Supplement first hit bank accounts, low-income earners increased their discretionary spending by 10 per cent above normal levels. 

Since then, they have continued to spend on discretionary goods and services at a rate 20 per cent higher than the baseline recorded on November 4. 

Meanwhile, high-income earners – defined as those earning above $104,000 a year – reduced their discretionary spending by more than a third (36 per cent).

Spending by category.
Overall spending has varied by category.

illion chief executive Simon Bligh said the numbers show government stimulus is working and has lessened the economic impact of COVID-19.

But he said there “will no doubt be a reckoning” when those support programs are unwound at the end of September.

Low-income earners have been carrying the Australian economy on their back since March,” he said.

“They continue to outspend high-income earners across both discretionary and essential spending.

“When September hits, we will be staring down the cliff face. Mortgages will need to be repaid, those in hardship will clamp down on discretionary spending, having a significant impact on the economy.”

So far, the government has downplayed suggestions its support programs will be extended beyond September and shot down rumours of a permanent increase to JobSeeker over the weekend.

Mr Morrison instead told 2GB’s Ray Hadley on Monday that employers were struggling to fill shifts because the higher JobSeeker rate was discouraging Australians from working.

In March, the government increased the unemployment benefit from $565.70 a fortnight to $1115.70 a fortnight. As it stands, the payment will revert back to pre-crisis levels on September 24.

Calls for JobSeeker increase mounting

The data from illion and AlphaBeta reinforces research from the Grattan Institute that found permanently increasing the rate of JobSeeker by $100 a fortnight would boost the economic recovery without removing the incentive to move into full-time work.

In its latest report, Grattan says the increased JobSeeker payments and JobKeeper wage subsidies have gone “a long way” towards insulating the country from further economic damage.

But scaling back JobSeeker and ending JobKeeper in September will jeopardise the nation’s recovery, with the two schemes collectively  pumping $14 billion into the economy every month.

“Turning off the tap could leave many households struggling to pay their bills and many of the businesses in slow-to-recover sectors, such as tourism and hospitality, unable to survive,” the report said.

It would also put a handbrake on the recovery as households anticipate the income shock by saving, and businesses try to minimise avoidable costs by holding back on employing workers.”

Even before the coronavirus outbreak, social welfare groups and economists were calling for the rate to be increased – both to support vulnerable Australians and to increase ‘aggregate demand’.

Aggregate demand is an economic measure of the total amount of demand that exists for all goods and services produced by an economy.

Higher aggregate demand means people buy more goods and services and businesses can hire more staff and earn more money as a result.

A 2018 report conducted by Deloitte for the Australian Council of Social Service found a $75-a-week increase to JobSeeker payments (then called Newstart) would cost the federal budget $3.3 billion a year but inject $4 billion back into the economy.

The extra spending would lead to higher tax revenues as well, with government initially expected to make back a quarter of the additional funds pumped into the economy.

“There is a significant body of evidence that higher incomes for the unemployed and other groups who are disadvantaged may lead to better national outcomes on indicators such as health,” the report added.

“That is, there are many additional social costs involved with entrenched disadvantage, and those costs are alleviated as the cycle of disadvantage is broken.”