Credit Suisse: JobKeeper on the way out

Via the excellent Damien Boey at Credit Suisse:

  • Missing $60 billion of stimulus. Just after the Australian Office of Financial Management (AOFM) revealed plans to lift bond issuance requirements to $130 billion, the Treasury and Australian Tax Office (ATO) revealed a significant shortfall in the size of the “Job Keeper” stimulus program. The Treasury and ATO are now of the view that the original March forecast of potentially 6 million enrolments onto the program is incorrect, and needs to be revised significantly lower. Officials now believe that the $1500 fortnightly wage subsidies will be taken up by only 3.5 million workers at a cost of $70 billion rather than the initially projected $130 billion. Unsurprisingly, headlines are emerging that the government has “over-budgeted” by $60 billion.
  • Not so much an accounting error, but an uptake problem. The Federal opposition is demanding an explanation for the “over-budgeting”, as if it were some sort of accounting or forecasting blunder. This is an interesting angle, because it suggests that the opposition is very much focused on keeping the books in order – a line of thinking almost consistent with austerity being a key performance indicator. But the reality is that “Job Keeper” payments are surprising to the downside of forecasts because of low uptake. Consider that aggregate hours fell by 9.2% in April despite the stimulus package designed to keep people technically on the payrolls, with the official unemployment rate rising to “only” 6.2% because of a sharp fall in labour force participation rather than the direct influence of the “Job Keeper” program. Consider also warnings from employer groups in recent times about poor accessibility to the program. For example, government advice has been that it would only reimburse businesses that already paid their staff at least $1500 per fortnight, meaning that firms employing many casual staff potentially missed out unless they took on board more full time workers into the downturn. And on the topic of casual staff, the subsidies did not cover casual staff employed for less than 12 months prior. We also note that businesses with turnovers of more than $1 billion per year needed to have lost 50% of turnover to be eligible for the subsidies. Finally, Job Keeper required businesses to pay their employees in the present,  backdated to 1 March 2020, but without receiving reimbursement from the ATO until May, such that many would have needed to access external finance to cover interim cashflow shortfalls.
  • Government preference for re-opening rather than stimulus as the way to recover. Even before revelations of low take up of “Job Keeper”, we note that government officials were floating the idea of trimming payments. It seemed to us that the government’s preferred way of supporting the economy was shifting firmly towards the relaxation of shutdown restrictions rather than the maintainence of fiscal injections. And post revelatons about the low take up of “Job Keeper”, political pressure from the opposition could well harden this stance, especially if austerity-like thinking is brought back onto the agenda this early into the crisis.
  • “Job Keeper” on the back bench. Many commentators will argue that the government should keep its power dry, by saving the missing $60 billion worth of stimulus for a rainy day. But underneath many of these claims is the view that the Federal government is somehow funding constrained and needs to eventually pay for the stimulus. This is not technically correct. Fiscal deficits create deposits and reserves in the banking system, because they occur in the first instance on “overdraft-like” terms with the RBA. Whether or not the government chooses to spend $60 billion today or tomorrow is not a question of funding or sustainability of funding – it is a matter of choice. Nevertheless, we see choice turning towards early austerity, at least until it is clear how well the economy is performing post relaxation of shutdowns. Therefore, we think it likely that the government does not keep Job Keeper beyond its original shelf life, with a small risk that it could be pared back early. The problem we see is that the failure to maintain the strong public sector credit impulse could prove untimely, if the private sector credit impulse is fading simultaneously on the back of housing weakness and global de-leveraging pressure. We think that if the government wants to maximize the value of $60 billion worth of “soft dollars” within its ideological framework, it should consider redirecting its focus towards incentivizing small and new businesses to survive and thrive, rather than continue trying to massage the technical level of unemployment down to support the optics of the housing market and banking system. More help for small and new businesses would support confidence by dealing with the conception that workers are getting bailed out rather than firms. It would help to mitigate permanent business closures in the economy, limiting the rise in bank bad debts, and the decline in productive capacity.
  • Saving or spending stimulus? For what it is worth, the early evidence is that Job Keeper stimulus is failing to prevent an increase in the aggregate household saving rate. To be sure, high frequency surveys like the ones conducted by AlphaBeta, suggest that really distressed households are spending stimulus payments on essentials, supporting overall spending at higher levels than otherwise would be the case. But nevertheless, the surveys also suggest that people that can save more are saving more, pulling in the opposite direction. Recent consumer confidence, retail sales and credit aggregates data corroborate this view. After all, consumer confidence plunged in March and April, recovering only some of the losses in May. Nominal retail sales fell in April by more than labour income did, even after accounting for extremely sharp falls in aggregate hours worked, and even after accounting for technical payback from March’s early shutdown hoarding behaviour. Finally, credit aggregates reveal that investor mortgage repayment activity is lifting materially to offset the fall in mortgage repayments from distressed owner-occupiers (as debt holidays are extended by the banks). In the circumstances, we think it is too early to consider paring back Job Keeper or any other large scale fiscal stimulus. We think that the peak in the household saving rate will only be reached when there is clarity that housing is stabilizing or recovering. But such clarity requires border restrictions to be lifted or waived, potentially at the expense of increasing infection risks from COVID-19 and its mutations. Alternatively, more stimulus could be thrown in the direction of housing, even though the Reserve Bank of Australia (RBA) is tapped out on rates …

Simply lift JobSeeker to something approaching a living wage as you cut Job Keeper. Then let the cards fall where they may.

David Llewellyn-Smith
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