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The money tree: How the Americans and Brits responded to COVID


Pinidu Chandrasekera

By

August 24th, 2020


How does Australia’s economic response to COVID-19 compare to the rest of the world? Join Pinidu as he takes a scalpel to assess the stimulus packages from Washington and Westminster.


IT’S no secret that the onset of COVID-19 has managed to seep into almost every facet of our lives. How many of us could honestly say that we even knew who an epidemiologist was before this insidious virus hit our shores? Words such as ‘social distancing’ and ‘COVID safe’ have become seemingly perennial additions to the English vernacular—and we now know more about the intricacies of facial masks than we ever thought was necessary. 

But it is indeed during times like this that the decisions of our policymakers and bureaucrats literally become a matter of life and death. It hasn’t just been health officers that have suddenly become household names, treasurers and finance ministers across the globe have also been thrust firmly into the spotlight as they roll out unprecedented levels of economic stimulus.

While most Australians have a fairly thorough understanding of Treasurer Josh Frydenberg’s JobKeeper and JobSeeker packages, the Australian media cycle has been largely quiet on the economic measures being undertaken overseas.

In terms of Australia’s effectiveness, the latest ABS data places the unemployment rate nationwide at 7.5% as of July, however analysis from BIS Oxford Economics indicates a figure of 8.3% had JobKeeper not been implemented. [1] This disparity had been higher in the earlier months during the nationwide lockdown, but with much of the country opening up (i.e. everywhere apart from Victoria), the idea is for businesses to gradually transition off the wage subsidy and back into operating under their own steam.

By the time the budget update rolled around last month, the Australian government’s rollout of fiscal stimulus had reached approximately 14.6 per cent of GDP. [2] However, there is general optimism that the worst hit to the economy is now behind us, with the RBA expecting a 6 per cent contraction over the year to December 2020 followed by growth of 5 per cent in 2021. [3]

Now, let’s turn our attention abroad.

Both the United States and United Kingdom have had significantly worse public health outcomes compared to our situation down under. The US currently holds the world’s most unwanted gold medal—with a devastating 5.6 million confirmed cases at the time of writing—and while the UK ranks comparatively well with just over 324,000 cases, the death toll remains amongst the world’s highest at almost 42,000. [4] Both Congress and Westminster introduced stimulus packages around late March/early April, yet there are considerable differences with regards to the political obstacles faced, and the combination of measures implemented.

The US stimulus package was almost derailed by visceral political tensions, which is hardly surprising in a system which has witnessed three government shutdowns over the past decade. What is surprising however, is that the man in the White House is not to blame. Instead, the fate of the world’s largest economy became a tense, and at times perilous, political tussle fought across the airwaves of America’s polarised media landscape.  

With a Democrat-controlled House and a Republican-led Senate—both sides had leverage to tilt the fiscal response towards their respective political agendas. The Democrats’ focus largely revolved around direct payments to the states for unemployment and healthcare, while the Republicans sought to stabilise an economy in freefall to keep businesses afloat. The polarising nature of the negotiations was exacerbated by the Democrats refusal to allow businesses support without treasury supervision or congressional oversight. Naturally, this incensed an economically conservative Republican party which had already made significant concessions in the form of large-scale government intervention in the American economy.

Despite days of tense negotiations and partisan sniping which sent financial markets into meltdown, a deal was reached, resulting in the passage of the largest stimulus package in modern American history—worth a truly eye-watering $2 trillion.

Known as the Cares Act, approximately 30 per cent of the stimulus went to individuals and households, with a further 25 per cent going to big business and corporations. The household stimulus consisted of a $1200 direct payment to all workers earning up to $75,000 per year, expansion of unemployment benefits and a temporary suspension of student loans held by the federal government. [5]

The British model followed a similar mantra of targeting households with Chancellor of the Exchequer Rishi Sunak delivering a wide-ranging wage subsidy covering 80 per cent of the wages for what turned out to be a quarter of the British workforce.

Sunak had been appointed chancellor just four weeks prior following an alleged fallout between his predecessor, Sajid Javid, and Johnson’s principal adviser Dominic Cummins. The impetus underpinning Sunak’s emergency stimulus mirrors that of Frydenberg’s JobKeeper package here in Australia, providing a salary subsidy capped at £2500 ($4750) per month to ‘furloughed’ workers—meaning any worker who has lost their hours due to the pandemic but remains on the books. [6]

But at a cost to the treasury of over £10 billion ($19 billion) per month, it was always designed to be a short-term measure, and by July the Chancellor was back, outlining new measures to smooth the transition away from government support. Surgical measures were introduced reducing the tax burden on specific industries, including hospitality and tourism.

Intriguingly, the tax concessions were accompanied by reform which has been floated around in Canberra at various stages over the last decade. The Value-Added-Tax or VAT (the British equivalent of our Goods and Services Tax) was cut from the standard rate of 20 per cent to just 5 per cent for all food, accommodation and tourism expenditure for the next 6 months. [7] Perhaps 2020 won’t be the last time we hear about a broadening of the tax base—watch this space.

As the saying goes, in every crisis lies an opportunity. On a scale which far surpasses the Global Financial Crisis of 2008/09, the post-COVID world will pose many questions for governments around the world on how they plan to structure and manage the economy over the medium to long-term. Indeed, it would be fair to assume that the battle between neoliberalism and a more Keynesian style of thinking is only just heating up.

[1] ABC News (2020), ‘Unemployment edges up despite massive coronavirus jobs bounce-back’, 13 August https://www.abc.net.au/news/2020-08-13/unemployment-jobs-coronavirus-abs-july-2020/12553936

[2] The Treasury, Australian Government, ‘Economic and fiscal update’, 23 July https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/economic-and-fiscal-update

[3] Reserve Bank of Australia, Statement on Monetary Policy – August 2020, https://www.rba.gov.au/publications/smp/2020/aug/economic-outlook.html

[4] The Age (2020), COVID-19 data centre, https://www.theage.com.au/national/covid-19-data-centre-coronavirus-by-the-numbers-20200401-p54g4w.html?permanent_redirect=true

[5] Visual Capitalist (2020), ‘The anatomy of the $2 trillion COVID-19 stimulus bill’, 30 March https://www.visualcapitalist.com/the-anatomy-of-the-2-trillion-covid-19-stimulus-bill/

[6] Sydney Morning Herald (2020), ‘On the ball: how the UK’s 80% salary subsidy works’, 27 March https://www.smh.com.au/world/europe/on-the-ball-how-the-uk-s-80-percent-salary-subsidy-works-20200326-p54ede.html#comments

[7] Sydney Morning Herald (2020), ‘Unthinkable’: UK unveils $54 billion stimulus as jobs cliff approaches’, 9 July https://www.smh.com.au/world/europe/unthinkable-uk-unveils-54-billion-stimulus-as-jobs-cliff-approaches-20200708-p55ac6.html#comments

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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