The Downsides of the JobKeeper Redux

It did not take long for commentators to label the revised joint Commonwealth and state financial support package for the economic victims of COVID-19 restrictions as “JobKeeper lite.”

This will doubtless irritate Australian Prime Minister Scott Morrison and Treasurer Josh Frydenberg after they invested precious political capital in burying the JobKeeper subsidy scheme at the end of March and insist they are not resurrecting it. However, the new package has much in common with JobKeeper, despite being different in significant ways.

The real issue is not how the new package should be labelled, but whether it should have been provided at all.

First, the differences. JobKeeper cost the Commonwealth budget $90 billion over its 12-month life.

The new package will not reach anything like that figure, even if it proves to be needed for many months and across several states. This is because its provisions are much less generous, at a maximum of $600 a week for individual employees and $10,000 a week for small and medium businesses.

JobKeeper delivered all its benefits through employers, not directly to employees. Moreover, New South Wales (NSW) and any other state that becomes eligible because of COVID outbreaks will share the budgetary cost of the payments to businesses. While states have provided some business support at their own cost before now, they bore none of the cost of JobKeeper.

Just what the total cost will be is unclear and will depend on how long Sydney remains shut, but a figure of $5 billion has been mentioned.

While most of this will fall to the Commonwealth, it will also come as a jolt to NSW Treasurer Dominic Perrottet, who handed down his 2021-22 budget just three weeks ago based on assumptions about COVID restrictions that have already been blown out of the water.

The costs to the state budget go beyond NSW’s contributions to the Commonwealth/state JobKeeper lite—for example, state revenue will also suffer losses due to the extended lockdown of Greater Sydney.

Another key difference is that Commonwealth support is confined to declared “hot spot” areas and will be switched off as soon as the Commonwealth’s own declaration is cancelled. In contrast, JobKeeper continued for a set period regardless.

What the latest package has in common with JobKeeper is that it aims both to support consumer purchasing power and to keep employees attached to their employers even if they have no work to do.

The business support payments are conditional on employers not reducing their full-time, part-time or casual payroll numbers from their current levels as of July 13. This is a disincentive for small and medium employers to lay people off.

The idea is to make the eventual recovery quicker by keeping employer-employee links intact.

Large employers don’t get the support but are better placed to weather the storm.

Leaving aside the design features, the question as to whether any scheme of this kind is warranted cannot be separated from whether the shutdown itself is warranted. If the shutdown is deemed necessary, then the employee and business support are justified because economic activity is being stopped by government decree for the greater good.

However, there is some circularity here. The support is justified if the restrictions are, but the availability of the support helps encourage state governments to impose restrictions and sustain them.

Ever since lockdowns and border closures became controversial, there have been arguments that the Commonwealth’s financial support for businesses and jobs, will, in fact, bias the states towards restrictions.

The cessation of JobKeeper at the end of March was expected to remove any such incentive for the states and make them more conscious of the costs of their actions.

However, in the months since then, there has been little evidence of the states being any less inclined to lock down and shut borders at the first sign of a COVID cluster developing.

They appear to be so firmly wedded to the eradication of COVID-19—however unrealistic and costly that is—that they are willing to impose and bear almost any cost to achieve it. No doubt their first preference is that the Commonwealth budget should bear the cost, but if not, then they will go ahead with extreme restrictions anyway.

Acceptance of the case for support when the government decrees shut down or curb business activity does not mean that all support schemes are justified. The design flaws of the original JobKeeper scheme, for example, are well known. The successor scheme will, hopefully, be less open to abuse.

We should also be alert to the economic downside of such schemes. As the Productivity Commission said in a timely review of COVID-19 economic support released this week: “The longer assistance is provided, the greater the likelihood it props up less efficient (or ultimately unviable) firms while providing windfall rents to profitable businesses.”

In other words, scarce economic resources can be trapped in businesses that have no future, and the inevitable transition to more efficient uses of these resources is delayed.

That is a longer-term concern. For the short-term, it is clear from Melbourne’s experience this time last year that even with financial support being provided, the NSW economy faces a severe setback—and because the state accounts for a third of the nation’s economy, this will create a major dent in the country’s economic outcomes this quarter.

The recovery will no longer be ‘V’ shaped and, in the worst-case scenario, could even go into reverse.