GOVERNMENT POLICY

COVID-19: Australia's Jobkeeper Response

Insights

What Has Happened?

On the 30th of March, the Australian government announced a historic ‘JobKeeper Stimulus Package’ in response to the Covid-19 Global Pandemic valued at $130 Billion; dwarfing the $52.4 Billion stimulus under the Rudd government during the GFC. JobKeeper functions as a ‘wage subsidy’ by the federal government and will consist of a $1500 fortnightly payment for employees of eligible businesses, therefore subsidising employees’ wages to support employment and incomes as social shutdowns have significantly impacted the conduct of business.

This stimulus will bring total Federal, State and Reserve Bank (direct government lending) COVID related financial investment to $330 Billion AUD 

 

The size and scope of this discretionary Fiscal policy is unprecedented, where recipients of JobKeeper are gauged by the turnover test: This test accounts for business revenues and the projected impact of viral control measures on turnover. It will cover full time, part-time workers, sole traders and charities.

The wage subsidy does not intend to be a lucrative stimulatory policy, but rather support the wages of employees and help “facilitate connections” between employees and employers to ensure that when restrictions ease, businesses can effectively and swiftly return to operations, without the lengthy process of new recruitment.


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Combating Economic Contractions

JobKeeper functions as a two headed stimulus package: direct government expenditure to support income will theoretically improve economic growth as the wage subsidy targets lower to middle income earners who lack job security and have the highest marginal propensities to consume (MPC). This means that supporting their income may increase consumption expenditure and translate to increased Aggregate Demand (Keynesian model diagram). 


However, consumer confidence and consumption expenditure has drastically reduced in response to Covid-19 Uncertainty. According to the Westpac-Melbourne Institute Consumer Sentiment Index, Consumer sentiment fell from 100.7 to 75.6 from April 2019 to April 2020. This reflects that irrespective of government stimulus, the translated economic effects are unlikely to provide substantial economic boost.

Keynesian Model Diagram


An increase in government expenditure, translating into higher consumption will increase Aggregate Demand from AD1 to AD2 (blue to purple line). However, this increase in expenditure will have a further ‘multiplied impact’ on national income through the multiplier given as k= ΔY/ΔAD. It is affected by the marginal propensity to consume: k=1/(1-MPC).

Targeting full employment

By subsidising wages, firms are more inclined to maintain labour forces, therefore reducing the current unemployment rate and placing a cap on future rate increases as less individuals will ‘actively seek employment’ once restrictions ease.  Further, the government hopes that employers will “maintain their connection to employees” and by keeping individuals in work, it l support a greater economic ‘bounce back’ as firms can quickly return to operational normality. Without JobKeeper, businesses have no incentive to maintain labour as they pursue cost reduction methods. JobKeeper’s employment benefits also allow for the government to undertake more extensive social restrictions to manage Covid-19 more efficiently without fears of unmanageable increases in future unemployment.


Further JobKeeper also supports cyclical unemployment (unemployment caused by economic contractions or deficiencies in Aggregate demand) - increased consumption expenditure support decreases in unemployment as labour is a ‘derived demand’ and firms must employ a greater level of labour to satisfy excess demand, which further recircles into greater economic growth via the multiplier effect. 


Australia’s labour market policies largely function as a social institution to uphold standards of living and equality compatible with Australian values. JobKeeper will prevent widening income inequality and function in similar ways to Australia’s existing Fair Work Act in supporting labour market cohesion. The large majority of impacted workers are those in lower paying, lower skilled positions within vulnerable industries. Consequently, these individuals are easily replaced, especially due to high labour market spare capacity, and face future long- term unemployment and daunting prospects of re-skilling (which is difficult as the economy undergoes Covid induced structural change and lacks direction). JobKeeper will prevent these threats by keeping people in their jobs. Further, JobKeeper may also allow for both individuals and employers to engage in diversification. Businesses under less burden from wage suffering can provide investment into restructuring production to source income from different sectors (Small Scale Steel producers Almec have shifted from small scale construction supply to now filling the gaps through steel fabrication in medical/building supplies), whilst individuals can engage in skills growth whilst in their current roles to improve future employability or current productivity. 


BOGS (Balance on Goods/Service)

By supporting domestic unemployment, JobKeeper can help Australia increase its exports of essential products and key resources which will be in significant demand as the global economy aims to enter recovery periods in the medium to long term. Industries which will provide export growth include Australian Pharmaceuticals (primarily through CSL) and Australia’s iron ore exports which is vital for future global infrastructure development undertaken via discretionary fiscal policy.  Further, JobKeeper has also enforced an ‘Australia first’ stance via a reduction in imports in an effort to support domestic manufacturers. This will holistically improve the trade Balance/BoGS (X-M).


Government Budget Deficit and Net Foreign Liabilities Effect

However, JobKeeper will serve as a significant budget cost in the long term, whilst government net debt will increase from 18% to 70% of GDP post Covid, therefore increasing national Net Foreign Liabilities in the medium to long term. According to the twin deficit’s theory:

(𝑴− 𝑿) = (𝑰 − 𝑺) + (𝑮 − 𝑻)


An increase in the budget deficit (G-T) and a consequent increase in the savings investment gap (I-S), as governments consume the national savings pool to fund borrowings will therefore lead to an increased Current Account Deficit (represented by M-X). External stability may become a focus during and after the pandemic. A stronger ability to finance external obligations may result in Australia receiving increased investment which will provide stimulatory growth, which is vital as investors will become increasingly wary of where they place their funds.


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