Fiscal Stimulus In Full Swing; PM Unleashes Another $66b, Room for More

Australian Parliament passed the necessary legislations required for the $17.1 billion and $66.1 billion packages on Monday.

Next session of the Parliament is months away, but the break may get cut short – should the nation needed emergency sittings.

Also read: Policy Response Series: RBA Set to Fix Front End Of Curve, Cash Rate Hits Record Low

Workers & households

Commonwealth Govt had announced that $17.6 billion which was largely a quid pro quo in the face of COVID-19 led disruptions for business and a little for households. It included tax free $750 payment to social security, pensioners, veteran, eligible concession card holders, income support recipients.

In the latest package, there are several measures. A $550 fortnightly payment (coronavirus supplement) would be paid to a range of new recipients including parenting and jobseeker payment and youth allowance payment.

Service Australia would need 5k new staff to support the delivery of the government services, and this fortnightly payment would be paid for 6 months, which is estimated at around $14.1 billion.

Additional $750 payment is estimated to cost $4 billion. In this benefit, the recipients would include those who are on social security and veteran income support or they are eligible concession card holders, but not those who are receiving income support/coronavirus supplement.

Superannuation could be accessed, minimum drawdown removed. Particularly to individuals who are in financial stress due to COVID-19, the Government has allowed to access up to $10k in superannuation in 2019-20, and a further $10k in 2020-21.

Citizens eligible for the service could apply at myGov before 1 July 2020, and a further $10k post that date. It would not be taxable and withdrawn money would not impact Centrelink or Veteran’s Affairs payments.

For account based pensions and similar products, the Government has lowered minimum drawdown requirement by 60 per cent for the year 2019-20 and 2020-21.

A reduction in social security deeming rates would cost around $876 million. Starting from May 2020, the lower deeming rate would be 0.25% and higher would be 2.25% - this is to reflect the latest rate cuts by the RBA.

Keeping businesses in business

Earlier package included a range of measures for the business. The instant write-off threshold was increased to $150k from $30k, including businesses having turnover of less than $500 million until 30 June 2020 – this was estimated to cost $700 million.

The depreciation deductions would allow the businesses having less than $500 million in annual turnover be able to avail a 50 per cent deduction during the year of asset purchase, thereby incentivising investments.

Eligible small and medium businesses to receive payments between $2k to $25k for businesses having turnover of less than $50 million. This would be a tax free payment for business employing staff between 1 January 2020 to 30 June 2020.

Besides, there was an incentive payment for businesses that employ apprentice or trainee during the 1 January 2020 to 30 September 2020. It was noted that severely impacted communities would be given fee waiver, which included tourism, education, agriculture etc.

SME Guarantee Scheme to support funding for small & medium enterprises. It would enable the lenders to extend new credit to the SMEs. Australian Government would provide guarantee to 50% of the fresh credit extended by eligible lenders to the SMEs.

This scheme adds to the Australian lenders’ support to the SMEs with existing business loans. Earlier the Government has established a fund to invest in warehouse facilities and asset backed securities having SME loans as underlying assets.

Australian Office of Financial Management, which is managing the Australian Business Securitisation Fund, has been provided with an investment capacity of $15 billion to invest in wholesale markets.

SME scheme augments the $90 billion term funding facility by the RBA, which has emphasised on SME lending. It was noted that this scheme would provide guarantee of up to $20 billion in an effort to support $40 billion SME loans.

Additional relief to financially distressed business. Commonwealth Government has increased the threshold for a creditor to trigger statutory demand notice, thereby buying businesses time to repay obligations leading to liquidation etc.

It was noted that this measure has added to the earlier ones with increased write off threshold, depreciation deductions, targeted support to coronavirus affected communities, supporting apprenticeships and training.

Aviation industry gets a breather. The Government has committed $750 million to keep support Airline and Airports. It is directed to ensure timely cash flow to the business at the backdrop of suppressed mobility and transportation.

Implications

Australian household has been given decent support by the government and this coupled with business support, is likely to spark a quick rebound as coronavirus led logjam recedes. Payments to citizens are likely to provide some relief with additional buying power.

If superannuation drawdown were to be eligible, it is likely that some households may choose to repay debt in order to defy financial distress. The measures taken by the government has ensured that employees get paid to a larger extent.

Businesses have been taken care of largely, since $150k instant write off applies to businesses having turnover of less $500 million until 30 June 2020. Additional measures are likely to improve credit flow and funding costs.

Australian Government’s commitment to guarantee 50 per cent the SME loans means that the government would bear the equal brunt – if these underlying SME loans in asset based securities, warehouse facilities were to default – thereby sharing the potential adverse impacts of defaults with lenders.

Since Aviation sector has been provided with a tune of $750 million, the companies could stay afloat amid these times, but the Government is likely to monitor the situation closely and act accordingly.

China is starting to come back on track in terms of no fresh virus cases. Australian Dollar has plunged a lot – making export prices attractive for other countries. When coronavirus led logjams recede, the global economy could bounce back.