Flat White

Better targeted coronavirus cash is needed to avoid worse economic contagion

20 July 2020

5:00 AM

20 July 2020

5:00 AM

Tapering — rather than topping up — income support is key to sustainably and compassionately backing Australia’s vulnerable households and firms.

The defining challenge facing policymakers through the course of the pandemic will surely be the troika of averting the dreaded employment cliff, keeping the economy afloat, and maintaining social cohesion.

The task is set against the backdrop of promising signs of economic recovery — before the Victorian shutdowns — in workforce participation and employment in figures released yesterday. While unemployment has jumped, this is mostly because more people are looking for work, rather than more people being laid off.

Yet, mixed signals have been sent as the government comes to terms with the second wave of pandemic welfare intervention. The signature schemes — JobKeeper and JobSeeker — will remain front and centre, though they’ll be tweaked in the weeks ahead.

However, it’s clear that sustaining the JobKeeper scheme in its current form is not only prohibitively expensive but also unjustified — particularly as more of the real economy unfreezes from hibernation.

It’s true there are sectors of the economy still under the pump due to government-induced shutdown orders — most acutely felt in entertainment, hospitality, and tourism.

But the government is now simply suppressing natural attrition and procrastinating the required adaptation of firms to what is a rapidly evolving business and consumer landscape.

The truth is that distortions created by JobKeeper risk being more malign — long term — than a light touch approach; at best flattening, rather than lessening, the curve on economic pain.

While the technical details of the ongoing JobKeeper scheme are to be spelt out next Thursday, the government has indicated that some degree of support will remain beyond the September deadline.

The promising sign is that JobKeeper will be tapered — via a reduction in the entitlement, a restriction in eligibility (that is, a tighter revenue threshold to meet), and will be targeted (to industries genuinely impacted rather than being universal).

This will reduce market frictions. But more will be needed to facilitate the transition of zombie firms — potentially by relaxation of bankruptcy conditions — and shifting affected individuals from JobKeeper to the unemployment benefit, JobSeeker.

Another element of the welfare response is yet more blunt attempts to prop up households’ spending. That’s included the circulation of further one-off cash payments that began last week; particularly to aged pension recipients.

What will remain a battleground is reaching a settlement on the permanent unemployment payment. Despite recently rebuffing a rumoured $75 per week increase to the JobSeeker payment, the government remains committed to sustaining an elevated lifeline.

Whatever settlement government proposes, it’s hard to see it satiating demands of agitators seeking to entrench generous entitlements — even to ambitiously replace current welfare approaches with job guarantees and universal basic incomes.

The government faces difficult and consequential decisions on the future of welfare. As ever, long term interests of recipients, taxpayers, and the broader economy are best served by sharpening incentives — rather than suppressing them — and unleashing the potential of markets.

Glenn Fahey is a research fellow at the Centre for Independent Studies.

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