COVID-19 has changed the world as we know it. (Wow that’s insightful!) Some things will change for the longer term (ways of working, blind reliance on a single lowest cost supply chain, being naive about cyber security and soft power, etc) some for the next 2-5 years (attitudes to monetary policy and budget deficits, globalisation, immigration flows, etc). In Australia one of the biggest short-term adjustments is, and will continue to be, what happens on fiscal policy.
The Morrison Government has moved swiftly through the initial phases of the COVID-19 crisis since March 20.
- Phase 1: mobilise government resources (state and Federal) to deal with the immediate medical crisis. Initial lockdowns of the general population, social distancing, quarantine of returned travellers and other at-risk people, contact tracing, etc. We realised quickly that eradication was a pipe dream and suppression combined with good contact tracing was as good as it gets.
- Phase 2: Immediate social security support through JobKeeper and JobSeeker in combination with gradual reopening of the economy a few sectors at a time. This triggered the dawning acceptance that dreams of a budget surplus had sailed way out of reach for many, many years. But these measures had to be a short-term gap filler given its enormous cost.
- Phase 3: WELCOME TO TODAY.
With budget discipline out the window, how do we best go about creating jobs and getting unemployment down to an acceptable level?
As Paul Kelly noted in The Australian recently, traditional Liberal Party ideology has been replaced by the immediate need for jobs and growth on a huge scale. I am a big fan of pragmatism, so what is the Morrison / Frydenberg plan?
Gone are the halcyon days of unemployment printing in the low 4% range. Getting it back to 6% ASAP is the new target. While a bigger government in the next few years is inescapable, not all Liberal philosophy has been jettisoned in this sprint for growth. Cutting regulation and pumping up the private sector is key to the plan.
Despite the (I’m seriously struggling to avoid using “unprecedented”) measures being enacted, Australia remains the lucky country. Well on a relative basis anyway. Australia’s GDP contracted by 7% in the June quarter. Ouch!! But other OECD nations have recorded much deeper recessions. The UK fell 20% and France 14%. New Zealand’s scorched earth policy cost them 12%.
In response, the Treasurer has reversed the course of regulation on two fronts — insolvencies and bank credit. Why? To keep small businesses afloat and drive the flow of credit (liquidity) across the economy.
On Friday 2 October, Josh Frydenberg announced the dumping of responsible lending obligations, the aim being to promote access to easier credit for individuals and small business. “This is not about the banks, it’s about the consumer” he said. Yeah, but he is a politician and the next election ain’t that far away. What did some of the most respected public servants not facing election say? Well, that radical organisation the Reserve Bank of Australia, represented by ‘out there’ Governor Phil Lowe, said it was untenable to have a system where “if a borrower can’t repay the loan, it’s always the bank’s fault”.
Hmmm… Slight change in attitude. It appears over-zealous regulation has been jettisoned in the cause of recovery from the COVID-19 induced recession. The banks had become way too conservative in their lending criteria due to fear of being prosecuted. This change in stance (assuming it’s reflected in the regulators’ approach) should see credit flow more freely.
Australian banks’ loan deferrals are beginning to wind back slowly. Expect this to accelerate in 2021. The value of total deferrals was 10% in May (the peak) and now represents circa 8% of total loans.
Our approach to insolvency will also be flipped on its head. Trading while insolvent was a “no no” under Australian corporation law, but the Government has signaled moving to a system much closer to the US Chapter 11 rules. These rules allow a company to file a plan to trade out of bankruptcy and stay in business. This will be critical for countless small businesses attempting to bridge the post JobKeeper gap and moving to standing on their own two feet again. Dare I say it, unprecedented.
The Government strategy will also pivot towards picking industry winners – especially in manufacturing. This is built on leveraging Australia’s energy resources to provide a cheap energy platform under which manufacturing can prosper. A major step is to extend the remit of the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC) beyond renewables. The focus will be on natural gas as the transition energy, with other technologies being clean hydrogen, energy storage (i.e. batteries and pumped hydro), carbon capture and storage.
The six winners identified in the $1.5b manufacturing plan are: Resources & Technology (particularly critical minerals processing), Food & Beverage, Medical Products, Recycling & Clean Energy, Defence, and finally Space. Not sure what our competitive advantage in this last category is. Ah yes, it’s coming back now, remember when we sent our first manned space mission to the moon just a few years behind the Americans? Great achievement that…
In true Liberal tradition, tax incentives are also a key part of incentivising individuals and small business to spend, employ and grow. As part of the new JobMaker Plan, approximately 11 million taxpayers will benefit from a tax cut backdated to 1 July 2020 in a bid to increase spending and boost economic activity. The Government will bring forward its legislated tax cuts by two years, lifting the 19% income threshold from $37,000 to $45,000, and lifting the 32.5% threshold from an income of $90,000 to $120,000.
The Government will also support businesses with aggregated annual turnover of less than $5 billion by enabling them to deduct the full cost of eligible capital assets acquired from 7:30pm AEDT on 6 October 2020 (Budget night) and first used or installed by 30 June 2022. The Government will allow eligible companies to carry back tax losses from the 2019-20, 2020-21, or 2021-22 income years to offset previously taxed profits in 2018-19 or later income years. From 7 October 2020, eligible employers will be able to claim a “hiring credit” of $200 a week for each additional eligible employee they hire aged 16 to 29 years old; and $100 a week for each additional eligible employee aged 30 to 35 years old.
All in all, some important regulatory reforms. Unfortunately, much more is required, especially in industrial relations.
What is the Phase 4 plan? The long grind back to budget surplus over at least the next decade and hopefully further serious reform to boost productivity - PLEASE! There is so much my kids can be angry at my generation about, just add the ballooning debt to the pile. My advice… stuff happens, get on with it!
There is much more in the budget on infrastructure, mental health, etc. For more details click in the following link.
Matt