This is not the GFC: How businesses and the government can beat the coronavirus downturn

coronavirus update for business

Prime Minister Scott Morrison. Source: AAP/Lukas Coch.

As the economic shock from coronavirus starts to hit home, the Prime Minister is putting a lot of faith in businesses to do the right thing, imploring them to keep workers in jobs and suppliers paid.

With the Treasurer due to announce a stimulus package today, businesses have been doing what they do best: asking for tax relief. But is reducing the burdens on business enough to prevent a recession?

JP Morgan chief economist Sally Auld says the Morrison government knows that protecting the labour market will require not just tax relief for businesses but cash for people most likely to spend.

“If the unemployment rate goes up, then we’re staring down the barrel of a pretty nasty recession,” she told Crikey.

Things like increased payments for Newstart recipients — something the government has long been ideologically opposed to — makes a lot of economic sense, Auld says.

“You need to give money to the people with the highest propensity to spend it, and we all know that Newstart recipients are very budget constrained.”

“The fact that [Morrison] is even considering things like that show how quickly circumstances have evolved and how worried they are about household spending.”

This is not the GFC

During the global financial crisis, Australian businesses largely responded by reducing employee hours rather than sacking people. Grattan Institute chief executive John Daley says that the government will be hoping for a similar response this time around.

“One of the big things the government will be considering is how do we ensure businesses don’t go under because of a short-term cashflow problem,” he told Crikey.

“The issue here is trying to keep businesses afloat. The more mechanisms they have to deal with that the better.”

But Warren Hogan, a former chief economist with ANZ and industry professor at the UTS business school, says the economy has changed since the GFC, bringing new challenges for the government.

“One of the biggest changes is the casualisation of the workforce. That is going to make it easier for businesses under pressure to cut back on employee hours and potentially push people off an income for extended periods of time,” he told Crikey.

“The government can’t reasonably expect business to keep people on in hard times. This is the new reality of our economy.”

Small businesses more vulnerable 

Both Warren and Daley agreed increasing payments for Newstart and pension recipients would be an important part of any stimulus package.

“There are plenty of good reasons to increase Newstart anyway. But if you’re after a stimulus, for every one dollar that the government puts out the door it’s more likely to be spent if it goes to Newstart recipients,” Daley said.

Hogan says keeping small businesses afloat, so that they can keep employees on, will be the biggest challenge for the government.

“We saw during the GFC, big businesses were very good at doing all sorts of things to keep people employed, such as reducing employee hours. But what worries me is small businesses — that’s where the real risk is here.”

This article was first published by Crikey.

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