One of the big learnings from events in history, like The Great Depression, is that tightening the purse strings during a financial crisis can serve to put the brakes on the economy. In that sense, stimulus becomes one of the vital mechanisms to keep the economy ticking, until it can start to function normally on its own.
With that in mind, it’s hard to over-play the importance of income support measures. For example, we estimate that were it not for JobKeeper, the effective unemployment rate would be over 15% versus what it currently is at 11.3%.
As speculated and expected, the federal government has confirmed it will extend its JobKeeper and JobSeeker programs, which were originally scheduled to end in September. Even though the cost of continuing these stimulus measures may appear immense, income support is essential to sustain economic activity and prevent the unemployment rate from rocketing.
What the refreshed package looks like
The JobKeeper payment has been extended to 28 March 2021, but with payments stepping down from the current rate of $1,500 per fortnight to:
- $1,200 per fortnight between 28 September 2020 and 4 January 2021; and then to $1,000 between 4 January and 28 March 2021 for those who worked 20 hours or more per week in February this year; and
- to $750 per fortnight then $650 for the same periods for those who worked less than 20 hours per week in February 2020.
For JobSeeker, the supplement will be extended from 25 September to 31 December 2020, but at the reduced rate of $250 per fortnight (down from $550) with reinstated means testing but an adjusted-income taper test. This takes the daily payment under JobSeeker down to $57.90 (compared to the pre-coronavirus level of $40).
Implications for the Australian economy
The Government estimates the cost of extending JobKeeper to be ~$16 billion and the extension to the JobSeeker supplement at ~$3.8 billion. This combined with an extra $2 billion of Federal spending on apprentice subsidies and JobTrainer announced last week means a total extra stimulus of ~$22 billion, or 1.2% of GDP.
The numbers are big, but they serve to both support the economy and prevent a fiscal cliff, which could have otherwise occurred from October if the income support programs had abruptly ended. With this softening and staging down, that fiscal cliff is looking more like a fiscal slope.
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