Millions of dollars are being poured into the Australian economy to offset the damage being done to businesses and employment from the coronavirus pandemic.
The federal government’s huge cash splash comes directly from the public purse and has been welcomed as necessary across the board by the Labor Party and economists as fears rise about how the outbreak, and the attempts to stop it, will hurt the country’s financial future.
But what do you actually get from billions of dollars worth of government spending? And why is the government using this money in the first place?
What do you get directly from the stimulus packages?
The federal government unveiled its $17.6 billion stimulus package on March 12, targeting mostly businesses and welfare recipients, including pensioners. Among the measures was a $750 payment to anyone receiving benefits such as low-income earners and youth allowance recipients. This came in addition to a $2.4 billion boost to health services.
You are eligible for the $750 if you are one of the 6.5 million lower-income Australian residents receiving any kind of government benefit. It will be paid as a one-off, in addition to your regular payments, from March 31 onwards and covers social security, veterans, disability support, Newstart and Austudy recipients.
Companies with a turnover of up to $500 million had the instant asset write-off threshold lifted to $150,000 temporarily (so businesses can immediately deduct the value of any asset purchases up to $150,000 in their tax returns) and the government has also pledged to help cover half the salaries of apprentices and trainees for eligible employers and give thousands of dollars in tax-free payments to hundreds of thousands of small and medium businesses. Most business benefits are paid out when business activity statements are lodged with the Tax Office.
Who gets what from the $17.6 billion federal stimulus package?
The federal package is front-loaded, meaning a burst of money comes at the start – $11 billion over the next three months. Here are the highlights:
- $750 one-off cash payment to welfare recipients will be received by 6.5 million Australians including those on the age pension, Family Tax Benefit, Youth Allowance, Newstart, Austudy, Disability Support, parenting and carer payments. Paid into our account from March 31, 2020. Budget Cost: $4.8 billion in 2019-20.
- Lower and higher deeming rates will be cut by half a percentage point, largely benefiting aged pensioners. Budget Cost: $600 million
- Investment incentives for businesses with turnover up to $500 million. The instant asset write-off threshold has been lifted to $150,000 temporarily and a 15-month investment incentive will give businesses a 50 per cent deduction on the cost of eligible assets. Budget Cost: $3.9 billion
- Up to 70,000 eligible employers are able to get a wage subsidy worth 50 per cent of apprentice or trainee wages paid from January 1, 2020 to September 30, up to $21,000 per person. Budget Cost: $1.3 billion
- For employers with turnover under $50 million, a tax-free payment of $2000 to $25,000 will be paid to about 690,000 small and medium businesses. Budget Cost: $6.7 billion
- For workers who fall sick or need to be isolated, Services Australia will offer a Major Personal Crisis exemption for 14 days for those who cannot meet current income-support obligations due to required isolation. This does not require a medical certificate unless a further extension is needed. Others may be covered under Youth Allowance, a Sickness Allowance or, after March 20, a JobSeeker Payment.
The NSW government has revealed a $2.3 billion package, including spending on health services and $1.6 billion in tax relief for small businesses. Fees and charges for small businesses such as bars, cafes and restaurants are being waived and $250 million will be spent to employ extra cleaners for places such as public transport and schools.
In Western Australia, there is a $607 million package, including one-off grants for businesses, and freezing the household cost for bills such as electricity, water, registration and public transport. Typically, these would rise with inflation.
Queensland was quick to introduce payroll tax relief to businesses and a tourism package of $27 million, and has introduced a $500 million loan facility to help affected businesses hold on to their staff, with up to $250,000 in payments.
How do stimulus packages help the economy?
When the economy is slowing down, it’s common to hear about the Reserve Bank cutting interest rates to try to encourage borrowing and spending. However, monetary policy is only one lever that can be pulled and rates are already at a record-low 0.5 per cent.
Automatic stabilisers, which are mechanisms that help manage fluctuations, also kick in through the ebbs and flows of the economy. These include government benefits and assistance, with improvements in jobs meaning fewer people need income help but as unemployment rises the opposite is true and more is spent helping these households.
But when the shock is more significant and these stabilisers are not easing the highs and lows, a less commonly used option – fiscal stimulus packages – can be used.
This is where the government directly takes action and spends extra money to give the economy an adrenaline shot. This can come in many different forms, such as cash handouts, grants, infrastructure building programs and tax reductions.
However, the overall aim is the same – to give the economy a big enough boost to get through a difficult period. For instance, providing cash handouts directly to households flows into retail and services, provided recipients of the money go out and spend. This helps keep people in these industries employed, paying their mortgages and bills and, in turn, spending on services and goods themselves. So if you’re a recipient of the $750 this time round, the idea is that you go out and spend it.
Prime Minister Scott Morrison has directly targeted the government’s package to keeping Australians in jobs.
“This plan is about keeping a business in business and this plan is about ensuring the Australian economy bounces back stronger on the other side of this and the budget bounces back with it,” Mr Morrison said.
However, big stimulus spending comes at a very real price – it can cause a budget deficit, where government spending is more than revenue. If too much is spent on stimulus, it can risk years of debt and deficit, but if there isn’t enough of a boost in the right areas the country risks entering into a recession.
The government is able to borrow to cover any shortfall in domestic demand, and collapsing global interest rates put it in a better position to do this. Getting the balance wrong can be difficult politically but, more crucially, it has a real-life impact on the livelihood of Australians, their jobs and future prosperity.
It’s not always clear until years down the track whether the actions being taken are the right ones.
Has there been a stimulus package like this before?
Yes. In Australia and overseas, governments have brought in stimulus packages in the past to try to avoid a recession or at least reduce the severity of a downturn.
The most comparable and recent example is the large stimulus package implemented during the global financial crisis by the Rudd government. An initial package worth $10.4 billion was unveiled in October 2008, including payments to pensioners, family support payments and first-home-buyer grants, to help lessen economic turbulence.
In February 2009, a second package worth $42 billion was announced. This included a $26 billion infrastructure program, $12.7 billion in direct payments to households and $2.7 billion for businesses. Within this package, Australians earning under an $80,000 threshold were given $950 and encouraged to spend to boost the economy.
“The government will move heaven and earth to reduce the impact of the global recession on Australia,” then prime minister Kevin Rudd said at the time.
Will there be more measures in 2020?
More states and territories are looking to introduce stimulus packages of their own to target specific industries and sectors at risk.
A second stimulus package from the federal government is expected following a rapid deterioration in the economic outlook due to the extreme health measures being taken to limit the spread of the coronavirus pandemic.
A 14-day quarantine period for all international travellers has now been introduced and is effectively a ban on travel for the foreseeable future. This will hit airlines particularly badly. Further, rules against mass gatherings of 500 or more people, coupled with moves to enforce social isolation, mean it’s highly likely any new stimulus will target tourism and the hospitality sector.
As with the GFC stimulus, the government has left fuel in the tank for more spending if it is necessary.
“Scalable is important because we will continue to see the disruptive impact of this in the months ahead. And we want to leave ourselves in a position to continue to respond to those in the months ahead,” Mr Morrison said on March 6.
This disruptive impact has already begun.
Extracted from The Sydney Morning Herald