Finance Finance News Fight against coronavirus will get a stiff dose of fiscal stimulus to save economy
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Fight against coronavirus will get a stiff dose of fiscal stimulus to save economy

Travel insurance is invaluable to many, but may not cover tourists for coronavirus-related losses. Photo: Getty
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As coronavirus continues to spread globally, the form of the Morrison Government’s economic stimulus package is beginning to take shape.

It will not include Rudd-style cash payments for everyone, so don’t expect to receive a $900 cheque in the mail.

But economists believe some individuals, particularly pensioners and the unemployed, should receive direct payments of some kind.

And hard-hit sectors such as tourism and education should receive prompt assistance, while businesses generally get help with cash flow.

Treasury secretary Stephen Kennedy said this week that any stimulus package would come in two broad phases.

The first phase will provide targeted assistance to sectors directly affected by the fall-out from the coronavirus — such as the services sector, tourism, and education — to keep businesses open and employees in jobs.

The second phase would be directed at households — to keep consumer confidence up and households spending.

Deloitte Access Economics partner Chris Richardson said the Federal Government would need to assess how big the economic hole is.

Implicit in what Treasury said this week — how the virus will take 0.5 percentage points off growth in the March quarter — means that’s a hole of at least $10 billion,” Mr Richardson said.

“The interest rate cut from the RBA this week will probably tip $1 billion back into the economy, so I’d be happy to see about $4 billion go out in stimulus initially — but it has to be done quickly.”

Maybe some money to households, but no ‘cash splash’

Prime Minister Scott Morrison on Friday announced a joint COVID-19 health fund will be set up to help the states.

He said the Commonwealth will immediately put $100 million down as an advance to the states.

“But we are estimating, based on the advice that we have at the moment, this could be as much as about $1 billion — $500 million each — that we would have to be allowing for,” Mr Morrison said.

Earlier today, Finance Minister Mathias Cormann told Sky News the Government’s priority was to support businesses directly affected by the downturn.

The Government wanted to keep businesses investing and to keep their workers in jobs.

But Mr Cormann ruled out Rudd-style cash payments for everyone, saying: “We will not be pursuing a cash splash in the reckless Rudd-Gillard fashion, no.”

For households, Grattan Institute economist Danielle Wood said income tax cuts do not work as well as cheques in the mail, but added it was clear the Federal Government would not be handing Australians $900 cash payments, like the Rudd government.

However, Ms Wood said there could be other measures aimed at households, such as lifting the Newstart allowance.

“You hit the most disadvantaged section of households and you know they go out and spend, and there’s a good case for doing that anyway,” she said.

Trying to stop Aussie ‘bubble’ bursting

International economist and Greece’s former finance minister, Yanis Varoufakis, said coronavirus would unleash economic damage, and stimulus was needed, but it may not prevent Australia from dipping into recession.

“It’s like aspirin to a dying patient,” Mr Varoufakis said at an event at the Wheeler Centre in Melbourne on Tuesday night.

It [stimulus] can’t do any harm, it can do some good, but it’s not going to save you if the United States, Europe and China go pear-shaped.

He said former Labor prime minister Kevin Rudd’s “short sharp stimulus” was “very effective”.

“But from that point onward, the Australian economy was riding on the coat-tails of the Chinese private credit bubble and the public money printed by the major central banks,” Mr Varoufakis said.

Now, with coronavirus creating havoc for major sectors such as tourism and education, and disrupting business supply chains, the economy was swiftly contracting.

He said given the underlying economy was a “bubble”, coronavirus may be the pin that bursts the bubble.

Economist Yanis Varoufakis talking with ABC business journalist Nassim Khadem.
Former Greek finance minister Yanis Varoufakis supports stimulus. Photo: The Wheeler Centre

Investment allowance on the cards

Ms Wood said the Morrison Government would do whatever it could to stop a recession.

That would almost certainly include introducing an investment allowance, which would allow companies to depreciate capital and help improve business cash flow.

“It creates an incentive to invest, and we think that measure makes a lot of sense,” she said.

“A big question mark is, will that be enough in an economy hit by coronavirus?

“It may be that the Government is going to have to go further, and then you’re looking at things like interest-free-loans [for business].”

She said to stop the economy from entering recession — technically measured as two consecutive quarters of negative growth — the Government would have to throw tens of billions of dollars at stimulus measures.

“It will need to be sizeable,” Ms Wood said.

A well-structured, large enough stimulus package could save us from recession.

EY chief economist Jo Masters agreed there would likely be an investment allowance, and there could be other tax incentives to encourage private firms to invest.

“We know when businesses are uncertain, investments are things that businesses hold back on,” she said.

“We might also see something about R&D.”

But she said whatever measures are introduced, there will still have to be a business case for them, and they likely be measures the Government already had in mind for the May budget but was now bringing forward.

It is really about around making sure the contraction is as short-lived as it can be, so we don’t hit a recession,” Ms Masters said.

“If you can do things that generate jobs or security, that helps that consumer confidence element.”

“There may be a little more infrastructure spending. The Federal Government may ask the states what infrastructure projects are shovel-ready in that they can be rolled out quickly.”

EY chief economist Jo Masters
EY’s Jo Masters says tax incentives could encourage private firms to invest. Photo: Supplied

Ms Wood said money could also be targeted at specific business sectors, such as tourism.

“Some short-term measures may be necessary for the tourism sector,” she said.

“Tourism had already been hit by the bushfires, so [with coronavirus] this is a double whammy for the sector.”

Health and jobs the keys

Mr Richardson said the stimulus package will need to focus on three things: people (health), businesses (jobs), and confidence (households).

He said on health, direct financial assistance may need to be directed towards nursing homes, and special assistance (such as supplies) to cruise ships with sick passengers stuck on board.

“The Government will need to think widely. It’s a moment to not be stuck inside silos,” he said.

Mr Richardson said businesses could be helped with wages subsidies, or by delaying when taxes need to be paid, but this was a tricky area.

“Actually identifying which businesses need help is really hard,” he said.

“The bureaucratic choice is: do we give assistance to a lot of businesses fast? Or do we create a system where businesses have to apply for the money which will be slower but some businesses will get more money?”

But he said the most important element of the stimulus package was keeping household and business confidence up.

“The success or otherwise of anything depends on the ability of the government, and the media, and Australians generally, to keep everyone’s confidence high,” Mr Richardson said.

Right now, the biggest threat to the Australian economy isn’t the pandemic, it’s the panic.

“The most vital bucket is the one that protects confidence.”

On Friday new figures showed retail sales have fallen for two consecutive months – by 0.3 per cent in January, and 0.7 per cent in December – pushing the probability of a contraction in GDP in the March quarter slightly higher.

Commonwealth Bank economist Gareth Aird said the retail sector has had to contend for several years with weak growth in household income and high household debt weighing on the spending capacity of consumers.

“More recently retailers have been hit by bushfires and now the big global shock of COVID-19, which will weigh significantly on aggregate demand,” he warned.

Nassim Khadem was engaged by The Wheeler Centre to host the event with Yanis Varoufakis.

ABC

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