The Morrison government, like almost every other government in the world, has unleashed a record level of spending to protect the economy from the coronavirus fallout.
It is budgeting to spend at least $133 billion on measures including its JobKeeper wage subsidy, the $550-a-fortnight coronavirus supplement for welfare recipients and small businesses assistance to keep on apprentices and trainees.
That’s extra spending. The budget itself is facing a deficit in 2019-20 of something north of $80 billion as tax revenues disappear. Next financial year it could be close to $200 billion.
The Reserve Bank of Australia has taken official interest rates to 0.25 per cent while offering commercial banks up to $90 billion to on-lend to small and medium-sized firms. It’s also effectively created more than $50 billion to buy state government bonds to help keep interest rates on these down.
Commercial banks have also given billions of dollars of relief to mortgage holders and many tenants have seen a reduction in their weekly rent.
Despite this avalanche of support, Australia faces its deepest recession since the 1930s. There are at least 1.7 million people on JobSeeker unemployment payments and another 3.3 million on JobKeeper. In other words, almost two in five workers are on government support of some kind.
Even though the economy is in its first recession since 1990-91, the number of bankruptcies and insolvencies is falling. That’s due to the closure of many courts and the government’s decision to make it much harder to start insolvency action during the crisis.
Data compiled by one of the nation’s biggest credit reporting firms, CreditorWatch, suggests there are thousands of zombie businesses – supporting hundreds of thousands of zombie jobs – that could fall over once rules around bankruptcy return to normal.
Last month, there were just 451 external administrations started across the country. According to CreditorWatch, that’s between 300 and 400 below usual numbers in better economic times.
There’s also been a blowout in the time certain businesses are taking to pay their bills.
Last June, transport and warehousing firms took about 11 days to pay their debts. This June, that blew out to 90 days.
Other large increases are occurring among construction businesses, those in the accommodation and food services, financial services, real estate and even in the health sector.
CreditorWatch chief executive Patrick Coghlan says an explosion in bankruptcies once insolvency laws revert to normal is on the way.
“The collapse in court cases means there’s a build-up of pressure, which is going to have to pop. And it’s going to pop in late September,” he says.
RBA governor Philip Lowe recently said while there may be zombie businesses stalking the nation’s malls and main streets, they were at least employing people. But the end of JobKeeper and JobSeeker could easily turn the zombies to dust.
It’s not just the credit industry that’s unsure about what will unfold in the coming months.
One of the easiest ways for banks to know a person is in financial trouble is that they miss a monthly mortgage payment. But with banks not collecting payments from hundreds of thousands of customers, this won’t be clear until September.
The nation’s banks have deferred 780,000 loans, of which 488,000 are mortgages, worth $236 billion.
Senior Commonwealth Bank economist Belinda Allen says the end of the bankruptcy changes could be a major issue for the jobs market. She says it is unclear how many firms will have to shut completely once JobKeeper and other business support measures end.
“This could push more workers into the unemployment queue,” she says.
How all these issues play out through the last three months of the year hinges heavily on Treasurer Josh Frydenberg, who will outline the state of the budget and economy on July 23. It will also include the government’s response to a Treasury review of JobKeeper.
Frydenberg and Prime Minister Scott Morrison have been at pains to say they are focused on a new phase of government support beyond September. They are fully aware of the dangers of withdrawing so much fiscal support at once.
The $550-a-fortnight coronavirus supplement will end on September 24. It is extremely expensive and the government is making much of anecdotal claims that people are shunning work to stay on the payment.
That shunning is partly due to the government’s design of the payment. People on JobSeeker are entitled to earn revenue and the payment is gradually reduced until it is fully extinguished once they make $1088.50 a fortnight.
A person can earn $1088 a fortnight and still get the full $550 supplement. Earn a dollar over, and the $550 supplement disappears, making it the most expensive $1 in income in the welfare system.
But the government, under pressure from a range of sectors including members of its own backbench, has made clear it won’t be going back to the pre-coronavirus JobSeeker base rate of $565.70 a fortnight.
JobKeeper will also be modified, to focus on particular regions or industries. Getting the design correct, so it cannot be exploited by firms that don’t need the assistance while also making sure that those that need a little support to get back on their feet, is vital.
At the same time, a decision has to be made about the bankruptcy laws that are keeping the Weekend at Bernie’s firms protected. Ultimately, a government can’t keep a business afloat if it has no customers, too much debt and no prospects of survival.
The Australian tax leader for Chartered Accountants Australia New Zealand, Michael Croker, says private sector and public regulator creditors such as the ATO are getting ready for a change to insolvency laws.
He says like a revamped JobKeeper, insolvency relief could be extended to particular sectors or firms that are taking “demonstrable” steps to reorder themselves.
Croker says tax debt, from pay-as-you-go to the superannuation guarantee, is rising rapidly. A government sending businesses to the wall because they can’t pay their tax bills would be anathema for the Coalition.
‘The collapse in court cases means there’s a build-up of pressure, which is going to have to pop. And it’s going to pop in late September.’
CreditWatch’s Patrick Coghlan
“For collecting tax debts resulting from COVID-19, there are also some novel approaches to consider to ‘stop the clock’ and give taxpayers a chance to pay it back,” he says. “The Irish government, for example, has announced it will legislate to provide that Irish Revenue will ‘warehouse’ deferred VAT and payroll taxes debts associated with the COVID-19 crisis.”
Croker says it’s a similar problem for the nation’s commercial banks.
“Banks are tightening their lending criteria and no amount of government and Reserve Bank jaw-boning with the banks can mask the fact that for some, the correct course of action is to wind up or seek the protections afforded under bankruptcy law,” he says.
Economists from the St Louis Federal Reserve Bank in the US last month released research into the potential scarring effects of the coronavirus pandemic. While governments hope for a short, sharp downturn, this research says extreme events leave an imprint on businesses that is not easily erased.
“Today, more than a decade after the GFC, the possibility of another run on the financial sector is raised frequently, even though the system is probably much safer,” the economists found.
“Likewise, businesses will make future decisions with the risk of another pandemic in mind. Observing the pandemic has taught us that the risks were greater than we thought.
“It is this new-found knowledge that has long-lived effects on economic choices.”
Weekend at Bernie’s had a sequel.
From businesses to employees to governments, no one wants a sequel to the coronavirus recession of 2020.
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Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.