A greater risk to our economy during the pandemic may not be governments running out of money but their inability to devise programs helping suffering businesses, writes Tom McCarthy.
LAST YEAR, I wrote a piece exploring the liquidity risk that COVID-19 posed to global financial markets, as plummeting business revenues threatened to avalanche into a cash crunch that could overwhelm the banking system.
Central banks and governments around the world, however, leapt into action. They pumped billions of dollars into the veins of not only the banking system but also the economy more broadly, with interest rate cuts to historical lows and relief and stimulus measures like the JobKeeper package here in Australia.
Although there have been specific industries and businesses that have suffered as a result of COVID-19 – some terribly so – the general success of the financial and economic measures deployed by governments and central banks are reflected by the performance of major share markets. Despite being pummelled early on in the COVID-19 story, they have not only recovered to pre-pandemic levels but in many cases, like with Australia’s ASX 200, gone on to trade at all-time record highs.
But can we have confidence that governments will be able to keep us in smooth waters, despite the continuing and, in some respects, worsening state of the pandemic? The Delta strain is casting serious doubts over the idea that once high vaccination rates have been achieved globally, COVID-19 will be rendered a dramatic, but in the grand scheme fairly short-lived, pandemic. This variation looks like giving hurricane COVID-19 a much longer tail.
A couple of crucial factors include, firstly, how much money governments are willing to spend. As you might even recall from the Coalition’s narrow focus on returning the budget to a surplus just a short 18 months ago, in usual circumstances, big budget deficits are seen as a bad thing. They affect a country’s credit rating and in worst-case scenarios, as we saw with countries like Iceland, Ireland and Greece following the Global Financial Crisis (GFC), can even cause a sort of national bankruptcy.
However, unlike with the GFC, COVID-19 has one way or another put every country into a similar financial quagmire and, everything in finance being relative, all of a sudden the historical significance of countries’ balance sheets have lost a lot of meaning.
But while the willingness to spend might endure for as long as pandemic conditions last, now that central banks have pulled their main emergency lever (interest rate cuts) and the big stimulus shots like JobKeeper have been fired – which, while effective, also proved to be overly blunt, resulting in significant inequity – there's a more important question.
How effectively can governments design and facilitate more tailored relief and stimulus packages that get money where it’s needed when it’s needed (which, in some cases, is virtually overnight)? And in doing so, keeping heads above water and preserving general consumer confidence so that we avoid an economic tailspin.
Maybe not so well, judging by major pandemic bungles like the misbudgeting of JobKeeper/Seeker, the handling of the Ruby Princess cruise ship, hotel quarantine mishaps and the vaccination program, to name but a few. The current Australian landscape also looks very different to 2020, when prolonged lockdowns were pretty much limited to Melbourne and the general view was a recovery from COVID-19 without the hiccups Delta is presenting.
That said, at least here in Australia, it’s not that governments aren’t trying. You can see from their online grants finder tool there are a number of COVID-19-related grants and other relief measures available. However, when you drill into the detail, the substance of these relief measures is questionable. It’s hard to imagine, for instance, how a one-time payment of $10,000 is going to do much for a Victorian business with a payroll of up to $10 million, that’s been in and out of lockdown since the end of May and can demonstrate a multi-week reduction in turnover of at least 70 per cent versus the same period in 2019.
Assuming that stingy offering does not reflect a change in sentiment by our governments to start tightening the purse strings, then it is instead evidence that the current relief and stimulus scheme is seriously inadequate.
As the Delta strain takes hold and the general manageability of COVID-19 in the community deteriorates – NSW probably blazing a trail that we’re likely to all walk – it’s clear that some businesses and individuals are going to go much deeper into the red. Governments need to be proactive in ramping up the sophistication of support measures so they can be targeted to these entities.
Based on their handling of COVID-19 related issues to date, I don’t think it’s unfair to suggest that for this nationally crucial exercise, career politicians and bureaucrats should check their egos at the door in leaning heavily on best-in-the-business financial and business strategy consultants. Not just paying them for some kicking-the-tyres insights, but integrating them with governmental departments like Treasury and Finance (and state government equivalents) and charging them with navigating this ship through perhaps COVID-19’s roughest seas yet.
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