While Frydenberg admits some small businesses “will not survive”, the RBA says up to 25% could fail

Josh-Frydenberg-businesses-fail-after-COVID-19

Australian Treasurer Josh Frydenberg arrives to speak to the media during a press conference at Parliament House in Canberra. Source: AAP/Lukas Coch.

Treasurer Josh Frydenberg has admitted that some businesses will not survive the COVID-19 pandemic.

However, while Frydenberg couldn’t put a figure on just how many would fail, the Reserve Bank of Australia (RBA) has said small businesses will be disproportionately affected, with up to 25% at risk of insolvency.

Small businesses in hard-hit sectors are in a particularly precarious position, the RBA suggested in its Financial Stability Review for October 2020.

In fact, between 10% and 15% of SMEs in the worst-affected industries still don’t have enough cash on hand to meet their monthly expenses, even with government support measures in place.

But, when asked on ABC’s Insiders yesterday whether the JobKeeper wage subsidy scheme would be continued beyond March next year, Frydenberg dismissed the idea.

“It’s only legislated until the end of March, and that is the plan,” he said.

“It was always temporary and it was always targeted.”

Rather, he said the government is focusing on the ‘next phase’ of the creating jobs, even if that means a spate of small business failures.

Currently, there are about 900,000 businesses making use of the JobKeeper program.

When asked how many of those businesses would not survive without it, come March, Frydenberg said these are not numbers he was keeping an eye on.

“Treasury doesn’t actually calculate the number of businesses that will be created or the number of businesses that will close,” he said.

“You can’t see any one program in isolation,” he added.

“Some business will not survive and obviously some jobs will be lost.

“There will be businesses that will fold, there is no doubt about that, and we can’t save every business and we can’t save every job.”

The Treasurer said the government is “focused on is giving every business and every job the best possible chance of getting to the other side”.

However, he went on to suggest there will be “a restructure” in the Australian economy.

The JobKeeper program has some “adverse incentives”, which could become more pronounced as the COVID-19 recovery goes on, he suggested.

“Namely, it prevents the reallocation of workers to more productive roles across the economy,” he said.

Small businesses “particularly vulnerable”

Frydenberg may not have the numbers, but the Reserve Bank of Australia has predicted a wave of business insolvencies to come, suggesting up to 25% of small businesses would fail if subsidies were removed today, before the improvement of trading conditions.

In the Financial Stability Review, the RBA acknowledged that we can’t predict the future. But, ultimately, it said there will be an uptick in insolvencies.

“Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing,” it said.

“It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19-related disruptions, and the timing and extent of the unwinding of the various support measures.

“Bankruptcies and insolvencies are currently very low because of the income support, loan repayment deferrals and temporary insolvency relief,” it added.

And, small businesses are set to be disproportionately affected.

Larger businesses appear to be “particularly well placed in terms of cash buffers”, the report said.

According to the RBA, before the pandemic struck, about 50% of Australian businesses had enough cash on hand to pay for their expenses for a month or more.

By June 2020, more than 40% of businesses reported having enough savings to cover their expenses for more than six months.

But, while large businesses have been able to reduce expenses and draw down credit lines, while making use of government subsidies, smaller businesses — particularly those in sectors like travel, tourism or retail, have not fared so well.

“At least 10-15% of small businesses in the hardest-hit industries still do not have enough cash on hand to meet their monthly expenses,” the report said.

“These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures.”

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