Federal Government mini budget or Fiscal update?
23 July 2020
On the 3rd of June 2020, the Commonwealth Government of Australia gave itself 7 weeks to review Job Keeper / Seeker. Today’s update isn’t a mini budget, rather the fiscal update on how the policy has worked and how much debt has increased because of it. So what do we know so far? That the policies haven’t cost as much as initially projected, the flare ups of the virus continue to impact all areas of the economy, that government is attempting to respond to the facts as and when they come thru in a fiscally responsible manner.
Unemployment is at the official June 2020 rate of 7.4% and 11.7% for underemployment. This means that we haven’t hit the 10% peak that was announced by the Governor of the Reserve Bank of Australia in April 2020. It could be argued that the expected June peak didn’t eventuate and it was delayed a few months. The early estimates indicate that the forecast is below our most previous peak of 11.2% in 1992, but had Job keeper not been implemented, could peak at 15%. In short, Job keeper / seeker is a positive impact.
The Policy tack by the government on Job keeper / seeker is due to a few factors, mainly the higher forecasts, where 2 months ago in May 2020, the policy was expected to cost $70 billion until September, which was originally forecast to $130 billion. The current forecasts show that extending Job keeper / seeker until March 2021 and December 2020 respectively, will only cost $86 billion. The changes are simple, Job keeper gets a tiered reduction from the flat $1500 per fortnight, to $1200 from October until December, then $1000 from January 2021 until March. Job seeker will be reduced in September 2020 from the $1100 pf to $815 until December 2020. Some estimate that the cost to the economy thus far is close to $95 billion. Job keeper alone has cost $29.8 billion and other experts believe the deficit could reach as high as $200 billion for the covid-19 policies. Whatever the budget deficit, it is evident that fiscal restraint is required, and for the sake of our future generations, we must temper the needs of those unemployed, with the burden on those who are employed.
Why does it make sense to taper off Job keeper / seeker? The government has stated in a few interviews that it is to reduce the disincentive to work. In the impersonal science or art of economics, there exists a principle that at a point, unemployment benefits create a disincentive to work. When you couple the disincentive to work factor, to the potential for some zombie firms that may never re-open, then there is a reasonable case for removing the support stimulus which is distorting the labour market. Economics is after all, the study of the efficient allocation of finite resources. The concerns from the left are Oliver Twist like, “please sir I want some more”. The call is essentially, don’t drop job seeker to where it was before Covid-19. While every government wants to do more, there is always economists that persist with watching all the indicators, not just unemployment, but also budget deficits and government debt.
Universities are a big part of the community and economy, so much so that they add $40 billion to the economy, but roughly 30% of that comes from chinese students. It is well documented that Australia’s education system relies on chinese students, where universities in the USA took to the opportunity pre Covid-19 to deal with the potential trade war by insuring against the loss of a significant portion of their income from china, Australian universities didn’t. With the CCP regime issuing warnings against Australia, it is likely that the 20–30% of chinese students will decrease over the coming months or years. Other countries universities, like the USA also have a large number of international students from china, while the UK’s international students are from more countries, chinese students form a substantial part of their numbers. While chinese students may decrease, it is probable that students from Hong Kong will increase and this will impact the property market. The good news is that the transfer of students and property buyers from china for Hong Kong will result in better than expected rates for Australia.
It is probable that the fiscal update by the Federal Treasurer will bring to light the positive effects of the proposed government stimulus, a clearer picture of the fiscal deficit and the impacts on various sectors of the country and economy. The good news is what we already know, greater than expected forecasts show a lower than expected debt. The bad news is the potential size of the deficit and how long it will take to repay it. Now to wait for the actual speech.
