Economic Stimulus Package
The Federal Government has compiled a $17.6 billion package of measures that aim to support businesses and the most vulnerable consumers in the wake of the COVID-19 coronavirus pandemic.
The details of the package are at: https://treasury.gov.au/coronavirus
The stimulus package will provide support for business and the overall economy.
The Big Picture
• The aim of the package is to “protect the economy by maintaining confidence, supporting investment and keeping people in jobs.”
• Overall the package won’t super-charge the economy. Neither does it guarantee that the economy won’t slip into recession. But it is a good first step. The measures are indeed targeted and temporary. As to whether the measures are proportionate remains to be seen – it is an evolving situation.
• The business measures require assets to be purchased for businesses to derive benefit. Whether businesses have got the income and confidence to spend remains to be seen.
• The one-off payments to pensioners and government benefit recipients should attract widespread community support and bi-partisan support in the Parliament. But there is no requirement for the $750 to be spent quickly or even at all, unlike a voucher or store value card with an expiry date. Still, food businesses, other retailers, utility companies and a range of other small businesses should derive benefit when the payments are spent.
• The stimulus package is on top of the health response to COVID-19 ($2.4bn) and assistance for bushfire region around $2 billion. So around 1 per cent of GDP potentially could flow through the economy over the June quarter.
• If businesses have been adversely affected by the impact caused by COVID-19 – and don’t benefit from today’s measures – they should be encouraged to advise their local member. That way, the government can keep the door open for other targeted assistance measures should they be necessary to support the economy.
• The fiscal stimulus is estimated at $17.629 billion, of which $10.95 billion will be spent by June 30, 2020. The impact of the total stimulus over the next two years (to 2021/22) is estimated at $22.93 billion or 1.2 per cent of GDP. The measures do not extend over the period after June 30, 2021.
There are four components of the package:
1. Delivering support for business investment
2. Cash flow assistance for businesses
3. Stimulus payments to households to support growth
4. Assistance for severely affected regions
Delivering support for business investment
• Increasing the instant asset write-off: From today, the Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020. (Cost 2019/20: nil; total cost $700m)
• Backing business investment: The Government is introducing a time-limited 15 month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost. (Cost 2019/20: nil; total cost $3.2bn)
• It is estimated that the two measures will support over 3.5 million businesses (over 99 per cent of businesses) employing more than 9.7 million employees
Cash flow assistance for businesses
• The Boosting Cash Flow for Employers measure will provide up to $25,000 back to small and medium-sized businesses, with a minimum payment of $2,000 for eligible businesses. The payment will provide cash flow support to businesses with a turnover of less than $50 million that employ staff. The payment will be tax free. This measure will benefit around 690,000 businesses employing around 7.8 million people. This measure will benefit around 690,000 businesses employing around 7.8 million people. (Cost 2019/20: $5.9bn; total cost $6.7bn)
• Supporting apprentices and trainees The Government is supporting small business to retain their apprentices and trainees. Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage for up to 9 months from 1 January 2020 to 30 September 2020. Where a small business is not able to retain an apprentice, the subsidy will be available to a new employer that employs that apprentice. This measure will support up to 70,000 small businesses, employing around 117,000 apprentices. (Cost 2019/20: $192m; total cost $1.3bn)
Stimulus payments to households to support growth
• The Government will provide a one-off $750 payment to social security, veteran and other income support recipients and eligible concession card holders. Around half of those that will benefit are pensioners. Payments will be made from March 31, 2020. This measure will assist around 6.5 million lower income Australians. (Cost 2019/20: $4.76bn; total cost $4.76bn)
Assistance for severely affected regions
• The Government has set aside $1 billion to support those regions and communities that have been disproportionately affected by the economic impacts of the Coronavirus, including those heavily reliant on industries such as tourism, agriculture and education. (Cost 2019/20: $100m; total cost $1.0bn)
What are the implications for interest rates and investors?
• There is no imperative for the Reserve Bank to keep cutting rates. While a rate cut is likely to be considered by the Reserve Bank Board at the April meeting, the Board also could conclude that there is enough stimulus being provided to the economy in the short term.
• There is always scope for the Reserve Bank, Federal and State governments to do more over coming months. Arguably there is plenty of scope for governments to do more given that budgets are in good shape.
• Certainly the recent announcement by the Queensland Government to give small and medium businesses a six-month payroll tax holiday is to be applauded.
• Recession should be avoided at all costs as it could lead to longer and deeper negative effects on consumers and businesses.
• A raft of retailers, especially supermarkets, have potential to benefit from the one-off $750 payments. Shares in Woolworths were up 0.7 per cent around midday after earlier being up around 2 per cent.
Published by Craig James, Chief Economist, CommSec