Flattening curve while not obliterating our economy

The national strategy to deal with the evolving coronavirus pandemic has been “flattening the curve” of infection. That’s why the government closed our borders, is limiting public gatherings and imposing social isolation, and is urging people to wash their hands. By spreading out the period of contagion, reducing the number of ill people at any one time, we reduce the pressure on health systems, especially on intensive care units. Of course, there’s a trade-off: social distancing measures are hitting the economy like a sledgehammer.

By flattening the curve, economics editor Adam Creighton explained on Tuesday, the economic pain is drawn out. “Businesses that could survive two months of shutdown might not be able to survive four,” he wrote. Scott Morrison now says the government’s $17.6bn stimulus is only a start. The package is trying to keep businesses afloat through payments and wage subsidies, providing tax breaks for investment, and putting cash into the hands of those most likely to spend. Accelerated depreciation rates and instant asset write-offs, we argued last week, appear like the ad hoc things you do to prod companies into expansion when the economy is going sideways.

We are facing a deep recession, with some experts fearing an economic depression, which is a 10 per cent contraction in gross domestic product. Financial markets are responding to what’s happening in society and the real economy, purging their riskiest assets, repricing even safe bets. The Reserve Bank is about to fire its final shot on interest rates, then it’s off to the debt shop and printery. There isn’t much our central bank can do on the demand side; its main game now is supervision, financial stability and liquidity, which all build confidence.

The Prime Minister and his brains trust are working on stimulus 2.0. The initial package, yet to be legislated, is not quite dead on arrival. But it’s becoming clear one of its vaunted design virtues — scalability — will immediately be tested. So, too, will existing delivery systems. How will they perform when IT platforms are inundated and public servants, meant to oversee the handouts ATM, are crook or looking after kids stuck at home? The public sector is playing its role. Those hardy automatic stabilisers — higher welfare payments, lower tax collections — will kick in. The fiscal footprint is about to spread. The states are stepping in with rescue packages. NSW is providing payroll tax and licence fee relief, and increasing construction spending. Queensland will defer taxes on business and provide interest-free loans.

The greatest challenge will be to keep people in jobs. Qantas, for instance, is cutting international flights by 90 per cent. It’s a big company, yet will struggle to hold its workers without assistance. But entire sectors have no buffer when customers disappear; wages, rent and loans are due. Casuals and gig-economy workers will feel the pinch. Banks are providing leeway on credit and energy companies will keep the power on; as we know, they are not charitable institutions. It’s clear the cashflow assistance from Canberra’s first fiscal hit will require more booster shots. One novel measure that could help sole traders and small businesses is a loan facility based on the Higher Education Contribution Scheme.

Finance Minister Mathias Cormann warns that businesses will close and people will lose jobs. During the early 1990s recession — which was policy-induced — it took 12 months for the jobless rate to jump from 6.6 per cent to 9.5 per cent. The unemployment rate peaked at 11.1 per cent a year later and it wasn’t until late 1999 that it recovered to 6.5 per cent. The welfare safety net exists for such calamities. It might need to be modified, temporarily, until this epidemiological and economic bolt from the blue has run its course.

Keeping small businesses viable must be a top-order issue. So, too, is making sure skills don’t wither and workers are ready for the eventual recovery. What at first required a targeted, sector-by-sector, fiscal rescue effort is morphing into an emergency maxi-budget. The highest economic priority for government should be to help businesses keep people employed — while continuing to lean forcefully on the COVID-19 infection rate until the medical pressures subside.