Maintaining JobKeeper beyond the health crisis would be a serious mistake

The government is wrong if it thought the pressure might die down a little bit now the bushfire crisis has been put out, and the daily increase in coronavirus cases has shrunk to single figures.

The Treasurer in particular is about to discover that the easier it is to announce free money during a crisis, the harder it is to take it away when the crisis is over. Although Frydenberg will no doubt face continuing pressure over the JobSeeker supplement, in many ways it is JobKeeper that is likely to prove the greater challenge.

Despite it being only mid-May, some have already started warning about the risks involved in stopping the JobKeeker payment (which expires in late September). JobKeeper, a $1500 a fortnight payment designed to keep employees attached to businesses experiencing significantly reduced demand, is expected to cost about $70 billion – though it is likely to exceed this cost.

The initial point is that we should be deeply sceptical of those calling for an extension of JobKeeper now, based on speculation about economic conditions in October. It would be a mistake to lock in hundreds of billions of dollars of spending before we see how the economy responds to the lifting of restrictions.

And while there is some merit to the claim there are flaws in the JobKeeper model, it is arguably better to simply allow it to run until its current end date, rather than try to perfect it, at the risk it stays around longer.

To understand the main problems with JobKeeper, it is important to understand what it’s actually doing. It may be marketed as a subsidy for employees, but its purpose and effect is provide a cashflow subsidy to business (primarily small businesses) and to mask the massive increase in unemployment caused by shutting down the economy.

According to reports yesterday, more than 3.5 million people are already enrolled for the wage subsidy, from more than 900,000 businesses. This suggests that the majority of businesses in this program are micro-businesses (fewer than five employees); so a good portion of JobKeeper money is going directly to the owners of businesses (and their family members), not traditional employees.

While it is important to note that JobKeeper was introduced in response to an external crisis, not in response to perceived market failure, this does not change its nature: we must avoid normalising government bailing out business.

Beyond this, at a basic level, wages are a major cost for business. For many businesses, especially in service industries, it represents by far their single largest expense. Some of these businesses can now transfer a large proportion of that cost to the government.

The fact that businesses were complaining about the need to front extra cash for JobKeeper top-up payments, even though they would be reimbursed later, makes clear where the subsidy actually falls. These top-ups are the main component of JobKeeper that is not a subsidy for business.

Supporters of JobKeeper may argue that in the absence of the payment workers would be let go, and hence businesses are not receiving a subsidy at all. Yet this is largely a furphy.

First, JobKeeper payments can only be made in respect of all employees or none, so even businesses that would downsize their workforce must be receiving at least part of the subsidy.

Second, this logic assumes that the main impediment to businesses maintaining their workforce is the physical restrictions of the lockdown – and that once it ends, workers will return en masse to their old jobs.

Yet it is far more likely that the economic downturn (in part caused by the lockdown) is primarily responsible for jobs disappearing. Those arguing JobKeeper must be extended or some recipients will lose their jobs are really just making it clear that, for many, there is no job to go back to.

In effect, these fictional jobs exist only for the purpose of the JobKeeper payment. Functionally, these people are being paid an extra $400 a fortnight (over JobSeeker) to pretend they are employed and not look for a new job.

However, JobKeeper is not only propping up non-viable jobs. Like all business subsidies, it is life support for sick businesses.

Some of these businesses would have failed in normal circumstances, much less these challenging times. Many more will not survive the coming economic headwinds, even when the major restrictions are lifted.

JobKeeper simply cannot prevent, in whole or in large part, the economic reckoning of a global pandemic.

Calls to extend JobKeeper – or worse still, convert JobKeeper into some kind of permanent employment subsidy – weaken the price signals that make the economy efficient.

While it is important to note that JobKeeper was introduced in response to an extraordinary external crisis, not in response to perceived market failure, this does not change its nature: we must avoid normalising government bailing out business.

Policies that allow the business sector to transfer losses to taxpayers are open to exploitation both by government and business. Inevitably, it leads to government picking winners.

If there is any argument in favour of these policies, it is that they would allow us to confront the public health crisis first, and then the economic crisis second. We have spent hundreds of billions of dollars to buy us time.

However, once the public health challenge is in hand, delaying the inevitable correction will not make it any easier to deal with.

It will likely take years until the economic effects of the pandemic dissipate, and as is always the case with economic downturns, the economy that emerges on the other side will be different to the one that was here before.

As painful as it will be, some businesses will fail. We should focus our rescue efforts on helping their workers find new jobs.