March 23, 2020 05:00:59
Finally, we’re getting serious.
After an insipid first-round economic boost that lasted all of four days before even the Government deemed it inadequate, the co-ordinated response from the Prime Minister, the Reserve Bank and even the Big Four banks in the past few days at last has held out some hope.
Perhaps, with a little ingenuity, understanding and co-operation, we will pull through this.
But there is no denying the challenge, and the coming months look bleak.
Our health system already is overstretched following years of cutbacks and demands for efficiency. Add to that a looming global recession as simultaneous shutdowns across the developed world obliterate corporate revenues and earnings, stretching rescue efforts beyond anything we’ve ever seen.
US investment bank Morgan Stanley issued this blunt warning on Friday: “We expect the global economy to be in full-blown recession in 2020 with global growth averaging 0.9 per cent, the lowest since the GFC.
“This would be a deeper recession than in 2001.”
Government to do the heavy lifting this time
To get here, the Federal Government has been forced to abandon almost everything it has believed in, or at least espoused, for the past three decades.
It has announced a massive boost to welfare, completely junked its mantra that budget surpluses matter beyond all else and jettisoned the idea that government should shrink to make way for the private sector.
A deeply religious man, this is Scott Morrison’s very own conversion on the road to Damascus.
His task has been made even more difficult on the domestic front, for he will be travelling alone. Like many other developed nations, Australia for decades has left economic management in the hands of central bankers. And our weakening economy over the past two years has forced the Reserve Bank to exhaust almost all its ammunition.
After last week whittling the cash rate down to 0.25 per cent, the RBA announced it was spent. Rates would fall no further. It now has embarked upon what it terms “unconventional policy”.
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It now will create money and inject it into the system. It will buy up Commonwealth Government bonds, essentially IOUs, in a bid to strong arm market interest rates towards zero. It has set up a fund so that commercial banks can access cheap cash and funnel it through to small and medium sized businesses.
The heavy lifting though will need to come from government. And the stimulus package announced over the weekend is likely to be just the first step in helping Australia navigate its way through these difficult times.
The global response has been much the same. Years of government austerity have left central banks all but impotent and now governments finally have been forced into action.
After the UK’s unprecedented move to stump up for workers’ wages on the weekend, the G4 nations (America, Eurozone, the UK and Japan) and China have announced stimulus spending to just shy of $US2 trillion.
Centrelink shakeup an imperative
Crises, by their very nature, need to be dealt with quickly and decisively. The success of both health responses and economic stimulus will get down to implementation. That’s the difficult part.
Like many Western nations, we’ve been slow off the mark. That’s despite watching China’s travails and the extraordinary efforts it launched to contain the virus.
The Morrison Government’s economic survival plan revolves around keeping people employed, supporting small and medium-sized businesses to retain staff and to inject money through the social welfare network to ensure those who are laid off can continue paying the bills.
It’s not a bad start. But it needs to recognise that mistakes will be made and money wasted along the way and that it cannot afford to be bogged down in bureaucracy or second guessing how it will be judged by history. That’s despite its own sorry record of blaming the Rudd government for overspending during the global financial crisis.
One major hurdle that it will need to overcome, and quickly, is its approach and attitude to social welfare.
The system, as it currently stands, is designed to make life difficult for anyone applying for unemployment benefits. Getting access to the dole involves more hoops than an NBA season.
Former treasurer Joe Hockey once referred to welfare recipients as “leaners” rather than “lifters”. It is an attitude that still resonates within the Government. Until now, it has steadfastly refused, despite intense lobbying from groups such as the Business Council, to lift Newstart benefits, sending a clear message to the unemployed that it believes they are to blame for their situation.
Centrelink will need clear instructions that it needs to remove the minefield of obstacles it routinely places in the path of anyone applying for benefits. It needs to rapidly evolve into a first responder.
This is an imperative and ultimately will determine our success in navigating the storms ahead.
Big business bailouts
Small business employs roughly 43 per cent of our workforce. Add in medium-sized operations and that rises to about 68 per cent. So, it is easy to see why the Prime Minister and Treasurer, along with the Reserve Bank, have homed in on this end of the business world.
But that still leaves a large slice of workers exposed. Big businesses generally pay more and extract greater efficiencies from their workers, by virtue of their size. And as this graph from Australian Parliament house shows, larger firms have been adding more workers in recent years.
That is likely to come to an abrupt end.
The rout currently underway on global share markets will severely impact big corporations’ ability to raise capital as revenues plummet. Costs will be slashed. And that almost inevitably means mass layoffs across the globe.
Just last week, Qantas was forced to stand down 20,000 workers, many of whom are on casual contracts with little or no safety net. Despite that, the company still is likely to burn through its available funds just to meet its working capital requirements, forcing it go cap in hand to shareholders for more cash.
Virgin Australia is in deeper trouble. It is burning cash at a rate that’s twice its available liquidity this half. Either its government-controlled owners — Etihad, Singapore Air, China’s Nanshan and HNA — and the privately owned Virgin group tip in funds to keep it afloat or it will fail.
That’s a potential disaster for the economy. As our third biggest export earner, tourism is a vital industry and air services essential.
It is now clear that pressure will build upon the Government for bailouts of public companies.
A large number of foreign multinationals, which have borrowed to the hilt in recent years, are also likely to hit trouble as revenues crater, forcing them either to abandon Australia or severely curtail their activities.
The problem is, once the Government throws a lifeline to one company or an industry, others will clamour for help, placing even more strain on our public finances.
If that happens, the Prime Minister and Treasurer Josh Frydenberg should look to the UK and what it did through the GFC with its beleaguered banks. The banks were bailed out. But the government ended up owning them or, at least, large slices of them. Shareholders and creditors lost out but the banking system remained intact and the government sold out as the situation improved recouping its cash.
It used to be called nationalisation; a term once considered abhorrent for any Liberal leader. But these aren’t normal times.
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