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Rodney Adler breaks down the stimulus package and the future effect of Covid-19 on our economy.

Rodney Adler breaks down the stimulus package and the future effect of Covid-19 on our economy.

The Australian government under the leadership of Scott Morrison has done an excellent job dealing with the economic implications of the coronavirus and of course the handling of the virus itself. With less than 7300 cases and currently just over 100 deaths, the leadership of Australia can be rightfully proud.

Everything done to date can be described as maintaining the status and even though an enormous amount of money has been spent and pledged, this effort will need to be maintained and increased if we wish to stimulate the economy.

Maintaining the status is great, but the next difficult step is yet to be taken, and it needs to be taken despite the current high level of debt and financial implications of stimulating. Without stimulation, our economy will simply not recover. I appreciate that the government needs to wean millions of people off government aid but the consequences of that will be profound and disturbing to an already battered economy.

The only question for me is whether this recession that we are absolutely in, will morph into a depression during calendar 2020 or will the stimulus being initiated around the world once again postpone the inevitable – a recession culminating into a depression in subsequent years.

JobKeeper is part of the federal government’s economic support package to subsidise wages for businesses impacted by the coronavirus pandemic. It was designed to help employers pay their employees during the pandemic for up to 6 months, with business claiming a reimbursement from the federal government through the Australian tax office. Recipients of JobKeeper will receive $1500 a fortnight before tax.

Leaving aside the recent underestimation, the federal government estimates that some 3.5 million Australian workers are benefiting from the payment and more than 950,000 businesses have applied to the scheme to date. It appears that Treasury overestimated the cost of the JobKeeper program largely because the medical advice upon which it was based, assumed the need for prolonged business shutdowns which did not eventuate and turned out to be massively pessimistic. Nevertheless, the government is giving aid to 3.5 million people and this $1500 payment per fortnight ends at the latest on 27 September 2020.

The other program politely called JobSeeker, which is in essence being “on the dole”, supports approximately 1.6 million people. JobSeeker runs out on 27 October 2020 and will then revert to the old rate. There are also over 500,000 mortgagees being allowed to defer their loan repayments – thereby adding it to their debt, which also ends in approximately six months from the date of commencement.

So at least 5 million Australians are receiving government aid in one form or another, the bulk of which will either stop or be significantly reduced before the end of October 2020. Therefore, one can conclude that there seems to be some sort of understanding that the pandemic will be over in six months, but is this actually the case? The government seems to think so as they have all the programs ending around that time. If you look at the valuation of the stock market today, it is also saying the worst is over. On both accounts nothing could be further from reality.

So, when JobKeeper ends and those people can’t be paid by their employer, a significant percentage will move to the JobSeeker scheme only to find that in a matter of months it will be impossible to live off that stipend. So, the unemployment rate will absolutely spike in November, the rental market and house prices will fall and by next January 2021, when the current and future figures become historical statistics reported to the nation, they will be horrible.

Those that are unemployed have either no capacity or diminished capacity to pay their rent. The government has put into place a regime that landlords cannot ask their residential tenants to leave for six months. They cannot be evicted! Some landlords are giving rent relief and rent deferral, but a lot of landlords are just giving rent deferral. For the tenant that simply means they are building up a large liability that they have absolutely no chance of meeting. That means ipso facto that we are going to have a lot of tenants just leave when the six months is over, leaving landlords unhappy and leaving good people (tenants) who normally would never consider not paying their debts in a very precarious position. They just won’t have the money.

Industries have been shut down, making it impossible for businesses and individuals to meet their responsibilities. The economic conditions are forcing very good people to take advantage of the six-month opportunity and then to leave as they have no other option. Yes, it gave landlords and tenants a six-month breather, most necessary and appreciated, but to what end?

I believe it’s important and sensible to just very briefly mention the Robodebt debacle and how in my opinion, the government is brilliantly solving a problem and distributing nearly $1 billion to people that are in need of help and support. For those unaware of the situation, a problem emerged because of the automated notices sent out after the income averaging process without human oversight caused significant problems and welfare recipients were hounded for years to pay money not owed. This now needs to be returned. This affects 380,000 people. The official figure to be paid to this neglected section of the community is approximately $721 million and will most likely grow to be even higher. It is a capital injection into the economy without calling it a capital injection and brings to an end a serious problem and a blight on the government. What an elegant way to solve the problem and help people at a time when people need help.

At a time when public debt levels in many countries is extremely high, as a direct consequence of the stimulation necessary not to fall into a depression during the GFC  and to ensure that we ”print our way” out of problems and maintain artificial and dangerous levels of economic and asset growth, many government’s  response to the coronavirus has resulted in a massive increase in fiscal deficits.

Simultaneous to this level of public borrowing, the border closures and temporary shutdown of most businesses has resulted in a huge loss of income for many firms. This is likely to lead people to liquidations and bankruptcies, causing an increase in public debt and consequently a very slow and mild recovery.

Interest rates can only go to zero, even though negative interest rates have been experienced and there is only so much debt a nation can handle before the world punishes them with a falling currency. The currency of a country is in a way a statement as to the economic stability and success of the country. Like a rising share price indicates the success of a company, a falling currency indicates the worlds concern for that country.

The often too used phrase “the perfect storm” seems unfortunately to apply to the world today. We here in Australia seem to have all the risk factors but our relationship with China and their preoccupation with punishing us and making a statement to the world will just add another layer of complexity for our government to deal with. In the end, it will increase the financial pain and suffering of our economy. What will the future hold for Australia? Certainly, the foreseeable future looks bleak, but the long term is good and Australia will enjoy again its great status as a destination and a place to invest.

AUTHOR: Rodney Adler

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