by Richard Denniss
[Originally published by the Australian Financial Review, 31 March 2020]
After a $62 billion shot of adrenalin designed to keep businesses going through the coronavirus crisis, the Morrison government has finally ditched its strategy of “targeted and temporary” measures based on existing policies.
Instead, it now wants to put large parts of the Australian economy into “hibernation” and will switch from cash grants to businesses to direct wage subsidies. The first shot of fiscal adrenalin was one of the most expensive policy slip-ups in history, but in the years to come it will likely pale in significance as the broader costs to the government and economy mount.
It’s much easier to freeze something to death than it is to bring it back to life. While the government’s new metaphor of “hibernation” is a welcome admission it can finally see the enormity of the economic collapse heading our way, it’s not at all clear, from an economic or political point of view, what hibernation really means.
Each month in Australia, 24,400 businesses cease to exist and 90,000 people change jobs, while about 300,000 enter and leave the ranks of the unemployed.
In a normal six-month period, that means 146,400 employers disappearing and 540,000 people changing jobs, with another 1.8 million movements between the poles of unemployment and employment. The turnover of businesses and employees is usually enormous but the numbers are always much larger in a downturn. So, can we really expect to bring all of Australia’s businesses back from hibernation?
The introduction of a wage subsidy for business is a big step for an Australian government to take, let alone a Coalition government that’s fought so hard, and for so long, against nearly any form of safety net or minimum standards for Australian workers. But desperate times call for desperate measures.
When we confront the inevitability that not all businesses will be able to come out of hibernation in the coming months, the government will be faced with two big choices. Employ an enormous number of people for about the cost of the wage subsidy it has been paying, or let those people languish on unemployment benefits. It shouldn’t be a difficult question to answer, once you strip away ideology.
Faced with the choice between funding an enormous welfare bill or an enormous public sector wage bill, the Coalition will almost certainly choose the latter.
There will inevitably be calls to rapidly cut unemployment benefits – but with well over 1 million people expected to be unemployed at the end of this crisis, the politics of such an approach would make even less sense than the economics.
Given that job subsidies are likely to cost about $60,000 per full-time worker and the minimum wage is now about $40,000, there will be little budgetary cost for the government in switching workers from firms that can’t be resuscitated in the private sector to the public sector.
The sooner the Morrison government starts thinking about what it will do with its enormous new workforce, the more efficient it will be in deploying it.
If the Centrelink queues teach us anything, it’s that the sooner you admit there will be a problem, the easier it is to manage. Centrelink should have been upgrading its website and lengthening its office hours weeks ago.
Similarly, the Treasurer needs to start thinking now about what tasks it would like the flood of workers in undead companies to do in the second half of this year.
Businesses won’t “bounce back” after the spike in COVID-19 deaths – they will need to be warmed up slowly before being shocked back to life. And if you think the $60 billion spent by government over the past month was ineffective, imagine how ineffective it will be when applied to ice-cold patients.
The costs of getting through the next three to six months will be enormous. The cost of bringing the economy back from hibernation will be bigger, and much longer lasting. It will take years before the private sector will demand enough labour to get unemployment back to the 700,000 we were happy to tolerate last year.
Until that private sector demand arrives, the government can either find useful work for those people to do, or spend tens of billions paying them to do nothing. The economics are simple, but the politics are going to be very, very hard.