Photo by Rob Lambert on Unsplash

JobKeeper was always quick and dirty. The design was far from perfect, with shortcomings I and others cautioned against.

But these were forgiven in the face of an impending calamity the likes of which Australia had never seen. The Government needed to act quickly, and they absolutely got the general idea and the order of magnitude right.

But the health interventions have worked so much better than expected that the generosity of the economic interventions is being reconsidered. In light of a report the Treasury is reevaluating the design of JobKeeper, it’s worth laying out where the scheme falls short and how it could be tweaked.

JobKeeper’s design inevitably undercompensates some firms, overcompensates others

The big, glaring design flaw in JobKeeper—never adequately justified by the Government—is that the subsidy is a fixed amount per worker regardless of the hours worked or wage earned.

The Prime Minister referred to this as the “Australian way”. This was meant as a compliment, but was seemingly the opposite given the bone-headedness of this particular design choice.

The COVID-19 economic crisis stems from a direct loss of business revenues and jobs caused by the shut downs and voluntary contraction in demand due to the contagion. These then have knock-on effects on the economy more broadly.

A first-best economic response is to stanch the bleeding at its source by replacing lost revenue on the condition that firms maintain their workers’ hours and wages. With that condition in place, there is no need to tie the amount of the subsidy to the amount of payroll.

Firms have a range of profit margins, payroll costs, and revenue losses due to the crisis. Simply covering payroll will no doubt save some firms and their workers’ jobs.

But it will inevitably undercompensate some firms, particularly those with low margins and large fixed costs like rent, and it will overcompensate others. Forcing firms to pay the entire subsidy to workers, even if their wage before the crisis was less, limits the extent to which firms can use the subsidy to offset other costs.

There are better ways…

If the scheme nevertheless must be tied to payroll, there are better ways to target it at the firms most in need.

Covering a portion of total payroll up to a cap with some additional support for non-payroll costs, as in the US and other countries, would reduce the extent of undercompensation. And capping the subsidy to each business so profit with JobKeeper is no greater than in the prior period would reduce the extent of overcompensation.

Another design flaw is the fixed six-month period of operation. A one-size-fits-all duration, without flexibility to respond to a shorter or longer lock-down or to extreme differences across sectors, is far from ideal.

The concern is overcompensation of firms affected for less than 6 months and undercompensation of those affected for longer. It would have been better to tie the duration to an objective benchmark, with adjustments for particular sectors where necessary. Of course, policymakers must be mindful of perverse incentives for firms to drag out any revenue drop to maximise the subsidy they receive.

There has been widespread confusion about eligibility for the scheme.

JobKeeper is payable if a business expects a 30% revenue decline in the coming month or quarter, and it is paid in arrears to businesses. But they must pay their workers up front at least the $1,500 fortnightly payment regardless.

If the month or quarter turns out better than expected such that they no longer meet the turnover test, it is unclear how they will be treated. The Treasury advises some leeway will be granted, but how much?

The problem here stems from the fundamental design of the scheme—that a fixed subsidy per worker is paid only if the revenue-drop threshold is met.

A better approach would be for the Australian Taxation Office to pay businesses a maximum subsidy up front equal to a percentage of payroll in the prior period. Then, at the end of the subsidy period, the actual subsidy could be calculated based on the firm’s actual payroll and profit over that period.

Any difference between the up-front payment and the actual subsidy could be reconciled through the ordinary business tax return process. If a business didn’t maintain payroll (either due to lower hours or wages), any shortfall could be taxed back. If its revenue only fell modestly in the period such that profit including JobKeeper exceeded that in the prior period, any extra could be taxed back.

This would have been simpler, clearer and better targeted, and also solved the cash-flow problems many businesses have complained about.

The reported underspend on JobKeeper makes the omission of short-term casuals and visa holders all the more puzzling. There was no good reason—morally or economically—to exclude these people, and the budgetary constraint has turned out not to be a critical concern either. They should be included immediately.

To tweak or not to tweak

As a legislative matter, JobKeeper has been designed for maximum flexibility. The legislation governing the scheme is merely a shell with all of the detail specified in legislative instruments. This gives the Treasurer great discretion to make changes to the scheme as he sees fit.

Whether he should do so is a tricky decision.

There are clear flaws in the current system that will create unnecessary winners and losers, and the economic outlook has certainly changed somewhat for the better. But the Government made a clear commitment to millions of businesses and workers to provide a certain level of support under certain conditions.

The last thing anyone needs right now, when the confidence of consumers and businesses is more critical than ever, is to have the government pull the rug out from under them.

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