Coronavirus: $130bn rescue package shows Australia dodged a bullet

Australia dodged a bullet when we chose the Coalition to lead the country last year.

Had the ALP won the election, during the last year we would not only have been hit by the franking credit disaster and the capital gains and negative gearing changes, but a huge volley of spending.

There is no way anyone knew what was ahead but it would have left Australia in a much weakened state to tackle COVID-19.

Instead we started with a budget surplus and that enabled Josh Frydenberg this week to announce a big employment-boosting package that I think will work. But as I describe below, there is a long term weakness that needs to be addressed.

Businesses have been standing down people they wanted to keep in their network and in some cases, where retrenchments were required, large cash payouts were necessary, which weakened corporate cash positions.

That’s one of the reasons that prompted such a big rise in demand for bank loans. That now changes.

The stockmarket initially rose sharply in reaction to the package. That’s partly because of the stimulation it will deliver, but also because it will curb those seeking to withdraw $10,000 from superannuation funds in the next couple of months and another $10,000 in the first quarter of 2020-21.

Once a person stays in employment most of the criteria for withdrawals are removed, although many will still have their hours reduced by 20 per cent or more and that will trigger the ability to withdraw superannuation money.

The funds got wind of the package and the frantic selling on Friday was curbed on Monday and then later withdrawn.

Long term changes

There are a number of aspects to the package that will trigger long-term changes for the nation.

I was particularly pleased that sole traders were recognised.

In the previous packages they been forgotten and I have reason to believe my comments had a role, as did the decision by Britain’s Prime Minister Boris Johnson to include the self employed in his stimulus packages.

Treasury officials and the tax departments of both Australia and the UK collaborate and both foster policies that have made it harder and harder for the self-employed to prosper.

Now the leaders of both nations have recognised the status of self-employed in their rescue packages and may even discover that networks of self-employed are the way of the future, because they often lift productivity enormously. The US understands this and in Australia the home building industry has achieved great productivity gains using small subcontractors.

Seeds of danger

But the Frydenberg package has some seeds of danger which if not addressed will bite the government around election time.

If you have a retail business it is straightforward to monitor your sales on a monthly basis and you can see whether you are down 30 per cent for those with turnover below $1bn, or 50 per cent for larger enterprises.

But a vast number of enterprises depend on contracts and whether people can pay debts. They now need to estimate whether their business will fall 30 or 50 per cent. Sometimes genuine estimates will be wrong and the enterprises will receive money (which was then transferred to employees) that they were not entitled to. And the tax officials will jump for joy and slam interest and penalties on them seeking to recover money that has been paid out.

That will create carnage around election time as the ATO punishes enterprises for genuine mistakes. For example, I suspect that in some cases once businesses find that they can afford to employ staff under the scheme they will find things for them to do. These activities will generate turnover which may mean the original estimates were wrong. The money paid to employees around the land will be spent and that will also cause some of the estimates to be wrong.

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Its really important that Josh Frydenberg announce now that if enterprises make a genuine mistakes and their employees benefit, then there is, say, three years to pay it back with no interest or penalties.

The Australian Taxation Office will play anti-small business games so there needs to be an independent appeal body legislated to make sure this does not happen.

However there is no doubt that in any vast stimulus package like this there will be fraud and that needs to be dealt with severely. It's a matter of getting the balance right.

We have come a long way from the first package, which gave money to pensioners that they could not spend because they had to be in isolation and depreciation allowances to companies that had no cash to spend.

One of the problems around the world is the health of leaders. You could tell in the early measures that Josh Frydenberg was not well although he did not have COVID-19.

He has now clearly fully recovered. And Scott Morrison, always a good communicator, seems to be right on his game.

This gives us a much better chance of us getting through this crisis.