Crisis calls for a double guarantee covering wages and loans

Now that Scott Morrison has finally conceded that fiscal stimulus, budget deficits and greater public debt are essential policy responses to a collapsing economy, it’s important to analyse whether the specific measures he has taken are optimal, given the current crisis.

The worst-kept secret in Canberra for months now has been Treasury trying to convince the Morrison government to embrace stimulus.The only reason it refused was because this undermined the Coalition's demonstrably false political narrative since the global financial crisis – that stimulus was bad in general, that ours was wasteful, and that it produced unmanageable debt and deficit.Unfortunately, this refusal to address reality matters in the real world, not just the political world. That’s because the measures being taken are now inexcusably late, resulting in rushed cabinet processes with scant attention to implementation. Hence, for example, the absolute debacle at Centrelink.As for the Prime Minister's assertion that, unlike the Labor government, his programs will be implemented through tried and tested “existing programs” – well, nice spin line, but it doesn’t reflect the reality.Three of his biggest programs, totalling $62 billion, have never been implemented by the Commonwealth before: $100,000 grants to firms; 50 per cent loan “guarantees”; and the drawdown of superannuation.And get ready for cheques being sent to dead people, because that’s what happens when you send payments to pensioners: some die between the announcement and the delivery date.Nonetheless, any reasonable person must recognise that Morrison faces a crisis of enormous complexity. This is two crises in one: a public health crisis and an economic crisis.Australia’s success or failure in public heath will determine the effectiveness of the economic measures. People just won’t deploy much stimulus until they feel physically safe.I’ve repeatedly argued the central task now for government is threefold: lock the country down (with comprehensive testing and contact tracing); support incomes until after the virus peaks; “triage” firms financially to avoid insolvency and mass unemployment.On the first, the government’s tardiness in moving to lockdown is inexplicable. Lockdowns have happened rapidly abroad. Belatedly, it seems to be imminent here.But the more half-hearted the health measures, the longer the time needed for stimulus and the greater the cost to budget and public debt.On the second challenge, as unemployment rises rapidly, the government’s response of doubling Newstart to about $1100 a fortnight is laudable. Annualised, this is $29,000 at a projected cost of $7 billion per quarter.But this will rise sharply in the event job losses exceed the government’s expectations. Market economists forecast unemployment rising to more than 11 per cent by mid-year.To this the government adds up to $100,000 for six months for each small to medium-sized enterprise (SME) with annual turnover under $50 million at a budget cost of $32 billion. Then there’s the 50 per cent loan guarantee for SMEs, costing $20 billion. It’s unclear what take-up rate is being assumed. In truth, it’s a poke in the dark.However these measures are poor substitutes for direct wage guarantees of the type now deployed by the British Conservative government.In Australia’s case, Deloitte Access Economics estimates that guaranteeing 80 per cent of Australian average weekly earnings (about $52,000 annualised) would cost $43 billion per quarter if applied to the 3.3 million most vulnerable workers.What advantages does this offer? First, it encourages firms to place staff on furlough rather than dismissing them outright, given that firms will be gun-shy taking on staff after the crisis.Second, it enables some firms to continue partial operations online, rather than shutting down completely.Third, it helps employees faced with unemployment to better manage their family finances in terms of food and rent during the rough two quarters ahead.Fourth, it’s better for individuals’ psychology and the slow rebuilding of confidence.Finally it’s likely to cost the budget about the same, as the alternative is massive unemployment and demand for Newstart.These measures also deal with the third core challenge: keeping firms with a cash-flow crisis afloat. The government could retain its proposed 50 per cent loan guarantee, but make it conditional on firms keeping more than 80 per cent of their staff on payroll. This would help SMEs handle their non-labour costs, while staff are supported by wage guarantees. The German government has done something similar.The policy objectives are to keep people in their jobs and keep businesses alive until the virus is under control. This combination of wage and loan guarantees (it could be called the double guarantee) should be the centrepiece of Australia’s approach.If individual traders, micro-businesses and smaller SMEs were reluctant to embrace such measures, then the government might consider securitising these loans, securing repayment over a much longer time frame than the banks may require.Of course, other policies will also be needed. For individuals facing mortgage payments, banks should be directed to provide a six-month deferral. Other direct assistance will be needed for renters (residential and commercial).If panic-buying continues or there’s food hoarding by suppliers, some form of rationing may be necessary to avoid scarcity and inflation. Federal and state agriculture ministries should be developing plans for long-term food supply if global supply chains collapse or problems emerge with our rural workforce or major logistics companies.For large businesses in critical industries, temporary nationalisation (full or part) may be necessary.For our exporters, Australia must lead the push through the G20 for a global moratorium on further protectionism.The Reserve Bank must keep a fixed eye on the liquidity of global financial markets.And superannuation should be left alone because once that genie is out of the bottle, that’s the end of retirement income security for working Australians.Finally, a word on the much vaunted quantum of government stimulus against the quantum of the likely global recession. The Labor government's fiscal stimulus of 2008-09 represented 5.8 per cent of GDP. We came through an advanced-economy recession of 3 per cent ( from previous positive growth of 2.6 per cent) by the skin of our teeth.At present, some market economists are projecting a worse downturn, including forecasts of a 24 per cent slump in US second-quarter growth – or 6 per cent annualised.Morrison’s boasted stimulus of $189 billionrepresenting 10 per cent of GDP is false on two counts. For one, $106 billion is made up of RBA liquidity measures, leaving only $83 billion in budgetary measures, or just over 4 per cent of GDP.Further, both the $100,000 grants to firms and the 50 per cent loan guarantees are entirely contingent on the take-up level.By contrast, our 5.8 per cent stimulus was the actual amount ploughed into the economy to keep us out of recession. Morrison needs to be truthful about what is real fiscal stimulus and what is notional.It’s always hard to see through the fog of war. But certain core principles are clear. Half measures, or what Morrison calls “scalable” measures, on both health and the economy have been repeatedly behind the pace.Half-measures on public health will prolong the eventual shutdown, resulting in a much bigger human and financial cost, as emergency economic measures, rising unemployment benefits and collapsing tax receipts are shouldered for a longer period.By contrast, immediate, hard, comprehensive measures, both in public health and the economy, may result in harsher short-term pain, but much more significant medium to long-term gain.Published by The Australian Financial Review on 29 March 2020.