Why JobKeeper can’t stop a bankruptcy avalanche
The Morrison government is being warned that its changes to the JobKeeper wage subsidy have only delayed the country hitting an economic cliff, with a growing number of now unviable businesses facing bankruptcy in coming months.
While the extension of a scaled-down JobKeeper until at least March 28, 2021, will ease the immediate pressure on businesses and their staff, it has also highlighted fears that, for some, the program is only postponing the inevitable.
The changes to the government’s two key income support payments were unveiled on Tuesday, two days ahead of a sobering economic update revealing the worst budget deficit since World War II: an $86 billion deficit last financial year – when a $5 billion surplus had been forecast – rising to a $184 billion deficit this financial year.
Net debt is set to rise to $677.1 billion.
The government has reconfigured its JobKeeper and JobSeeker payments to reflect an economy moving into the recovery phase.
JobKeeper will reduce from $1500 a fortnight to $1200 from September 28 until January 3, with those working fewer than 20 hours a week only receiving $750 a fortnight.
From January 4, the rate will drop to $1000 and $650, respectively.
Businesses’ eligibility tests will be unchanged but they will be applied every quarter from late September.
The JobSeeker unemployment benefit, formerly known as Newstart, will be extended until at least December. But from September 25, the $550 coronavirus supplement within it will drop to $250. That puts the total JobSeeker payment at a maximum $815.70 for singles, down from $1115.70, though recipients will be allowed to earn up to $300 to boost it.
From August 4, mutual obligations will also recommence, with recipients required to apply for four jobs a month and face penalties for rejecting an offer.
That requirement will increase again after late September. Asset tests and waiting periods will be reintroduced and the partner income test toughened.
Combined, the changes are designed to remove disincentives to work that were a byproduct of the flat-rate JobKeeper and boosted JobSeeker, and to stop people receiving more than their ordinary wage.
But small business ombudsman Kate Carnell says JobKeeper will still be propping up unviable businesses that probably should close. “We’re going to just end up with this huge wave of businesses that the insolvency practitioners just won’t be able to deal with,” she says.
Carnell says facing the reality early and getting advice would help businesses that can survive to do so and allow others to avoid mounting debts.
“People can get out with a modicum of dignity, paying their creditors and their staff,” she says.
Treasury’s newly published three-month review of JobKeeper, which prompted this week’s changes to the scheme, lists “undesirable” design features requiring adjustment.
Along with the need to reduce the level of support and better tailor it to ongoing need, the review says propping up unviable businesses and keeping workers in their pre-March 1 jobs is one of its “undesirable” effects.
When JobKeeper was unveiled in March, keeping workers attached to existing jobs was the primary reason for its creation. But as the crisis eases, the payment – only claimable through a single employer, regardless of how many jobs a person has – will act as a brake on productivity by stopping people changing jobs.
While a flat rate was needed initially to roll out the system fast, scaled change is now required to stop it hampering recovery.
The advice suggests the scheme is propping up businesses that were already teetering before the Covid-19 pandemic.
But Kate Carnell warns there are still pitfalls. Treasury agrees.
The Australian Securities and Investments Commission’s latest liquidations report reveals the number of businesses going into external administration has fallen dramatically through the pandemic, due to a range of bank and government supports, including temporary removal of the ban on trading while insolvent.
In June, liquidations were down 51 per cent compared with last year.
Carnell is urging the government to give struggling businesses a $5000 voucher to obtain a viability assessment and financial advice. Payment would then be made directly to the adviser to minimise fraud risk.
“There’s a really large number of businesses who normally would have gone to the wall and that’s without the others who are in a world of pain now,” she says.
So far, the government seems disinclined.
It is being urged to consider other new payments, too.
The Australian Council of Trade Unions is calling for workers to be granted pandemic leave to ensure those with virus-like symptoms or those who have been in contact with an infected person get tested and self-isolate until they return a negative result.
Victorian Premier Daniel Andrews revealed this week that nine out of 10 people who tested positive in his state in the fortnight to July 21 had failed to self-isolate. ACTU secretary Sally McManus said many casual workers without sick leave feel under pressure to keep working.
Further, Treasury’s review proposes a special wage subsidy for people entering the workforce for the first time during a recession in which jobs will be scarce and the ability to relocate or undertake long commutes limited.
Treasurer Josh Frydenberg declined to commit, pointing to existing incentives and promising he would have “more to say” in the upcoming budget.
He and Finance Minister Mathias Cormann are now focused on the full budget, delayed from May until October 6.
“We can see the mountain ahead and Australians begin the climb,” the treasurer said while unveiling the economic update on Thursday.
But the ministers could not say, hand on heart, that the figures could be relied on absolutely.
The forecasts say unemployment, now at 7.4 per cent, will peak at 9.25 per cent in December and remain high “for some time”. However, as JobKeeper is allowing some people who aren’t working to be counted as employed, the effective rate is more like 11 per cent or higher.
The overall loss of employment between March and September is forecast to be 5 per cent, a full percentage point greater than the plunges in the recessions of the 1980s and 1990s.
The forecasts assume no extension of Victoria’s six-week lockdown and no repeat elsewhere of the state’s predicament. Frydenberg’s figures also suggest pandemic-related government spending will ease after next year with only $1 billion allocated to virus-related spending for 2022-23 and nothing for 2023-24.
At the same time, the government acknowledges that the crisis won’t be over until there is a vaccine and nobody knows when that will be. Yet the budget update also says Australia’s external borders are likely to reopen on January 1 next year.
Without a vaccine, some external border restrictions may need to remain, meaning some industries – especially tourism – may yet need more support.
Independent economist Saul Eslake argues the government should have been brave enough to present the standard four years of forecasts – as New Zealand’s government did, without delaying its scheduled budget – instead of just two.
But he cuts the government some slack on the inbuilt uncertainties around the calculations.
“As [American baseballer] Yogi Berra famously used to say, forecasts are difficult, especially when it’s about the future,” Eslake says.
But he thinks the government’s downward-revised revenue forecasts seem slightly too “modest”.
Overall, the figures are, as the treasurer foreshadowed, eye-watering.
“Just because we’ve been acclimatised to these sort of numbers for a few weeks now, doesn’t make them any less shocking,” Eslake says. “Nor should we be unduly concerned this is going to break us, because it won’t. If we need to do more, we can afford to do more.”
He points to the very low borrowing costs. “Despite this humungous increase in debt, they will be spending less on interest as a proportion of GDP than they did in 2018-19 and 2019-20,” he notes, adding it will be the lowest since 2013.
“The point is, there’s no need to panic. To its credit, the government is not panicking. It has made a lot of decisions that have added to that debt.”
Eslake says any further stimulus should seek to maximise the impact on employment and household spending.
He agrees that bringing forward the 2022 tax cuts, which Frydenberg has not ruled out, would increase spending.
But Eslake ventures that spending the same amount differently might have more impact, for example on “well-targeted infrastructure spending, social housing or giving cash to low-income households who may not benefit from the tax cuts”.
Eslake suggests social housing meets an existing need and could proceed faster than large-scale infrastructure because community organisations already have well-developed plans.
Unlike large one-off bridge or rail projects, social housing projects could also be distributed across the country, require less large-scale imported equipment, and would be labour-intensive and use local supply chains.
The Australian Industry Group’s chief executive, Innes Willox, is also calling for more spending. “Australia should not waste the opportunity provided by this burning platform,” he says. “Sustainable employment growth will depend on higher levels of investment in infrastructure, housing, and by Australia’s businesses. This will require a concerted response to the crisis by all levels of government and by the private sector.”
The adjusted income support system still has some casuals and part-time workers – especially those with multiple small one-off contracts, such as in the arts industry – falling through the cracks.
Treasury’s JobKeeper review confirmed it wanted to recommend recasting the payment as industry-specific assistance targeting the worst-affected sectors, but says it would be “too difficult to define the affected sectors in advance”.
Instead, it opted for what it says is a “better” approach – changing the eligibility criteria to focus on actual decline in turnover.
When the budget update was released, Labor’s shadow treasurer, Jim Chalmers, suggested the government should have included measures to help rebuild the economy, not just forecasts.
“It wasn’t a plan, it was a pamphlet,” Chalmers said. “There were no new ideas in what the government presented today and there were very few insights as well … Every Australian desperately needs this government to do a far better job managing coming out of recession than they did going into it.”
Earlier in the week, Prime Minister Scott Morrison insisted political pointscoring was the furthest thing from his mind during the pandemic. “I don’t think Australians could care less when the next election was and, frankly, right now it’s got nothing factoring into my thinking, not at all,” he said.
Releasing the budget update on Thursday, Frydenberg contradicted the no-politics promise. “We are the party of lower taxes,” he declared, winding up an hour-long news conference. “We took to the Australian people $158 billion of lower taxes and that was endorsed by the Australian people. I don’t have to tell you there was quite a contrast in the tax plans that went to the Australian people in the last election. The other side had higher taxes, taxes that remain on their books, whether it’s housing, superannuation, on retirees – they’re the taxes that they were going to hit Australians with. Can you imagine hitting Australians with those taxes at this difficult time?”
His words suggest the budget forecasts aren’t the only government assertions that are subject to change.
This article was first published in the print edition of The Saturday Paper on Jul 25, 2020 as "On the precipice".
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