Photo by Tim Mossholder on Unsplash

The fundamental role of government is to secure the welfare and safety of its people. The COVID-19 crisis coming so soon after the summer’s extraordinary bushfires has created massive pressure on the Australian government to mobilise government systems to make payments to individuals and businesses.

While a pandemic such as COVID-19 seems to have been foreseeable, the government response is being developed on the run, and the broader economic impact is likely to last longer. The time scale of the COVID-19 health challenge is unclear, but the government package is set for six months.

The crisis reinforces two messages. First, the most important tools that the federal government has at its disposal are the tax system and the social security, or transfer, system. To rescue the economy and secure the welfare of the people, now and after the crisis, government must apply both tax and transfer systems, which must be agile and flexible.

Second, we must ensure that the tax-transfer system has some excess capacity, so it can to respond quickly to the increasing economic and fiscal risks we face in the future.

The COVID-19 stimulus including the business stimulus and Coronavirus supplement, JobSeeker and JobKeeper packages, and uplift in health spending, are of an unprecedented size. December’s MYEFO put this year’s federal expenditure at $490 billion. If the COVID-19 cost of $214 billion, or 11 per cent of GDP, is reached, this expands government by half and doubles the welfare state; it is more than the entire social security budget for the year ($180 billion) and nearly all personal income tax receipts of $230 billion – now an overestimate.

What is the role of the transfer system?

The social security, welfare or cash transfer system is designed to deliver fortnightly payments to those who need income to live on. It is striking that after an extended period of efforts to reduce social security spending, government now admits that this system is one of its most important tools for managing this crisis.

The JobSeeker package temporarily doubles payments for many working-age social security beneficiaries and suspends the waiting period and asset tests for payments, moving Australia from having the lowest benefit replacement rates in the OECD to around the rich country average.

Services Australia initially struggled to deliver the JobSeeker package, but the first lump-sum household payments have been processed – a much faster response than was possible in the global financial crisis a decade ago. Some delay is inevitable in responding so rapidly to a million new recipients, but delivery was not helped by our excessively targeted, conditional and understaffed regime now being experienced by many more Australians.

The lifting of the JobSeeker payment and winding back of conditions recognises that it was previously impossible to live on. The usual unemployment benefit is the opposite of the universal insurance system needed to deal with this household income shock. The crisis also reveals that there are still a great many working age people, especially temporary visa holders, who may not be eligible but who contribute importantly to Australia’s economy and likely need support.

The crisis shows that our social security model of conditionality, income management and rationing of income support is past its use-by date – social security is not a burden but crucial social infrastructure.

What does the tax system do?

The main function of the tax system is to deliver stable revenues. As a result of economic “hibernation”, personal and corporate income tax and GST revenues may be much lower than expected. That is not all bad news. The tax system helps us respond to the crisis by permitting deductions, absorbing tax losses, and not collecting tax when income declines. This shares the economic risk faced individuals and businesses across the population.

But using the tax system in this way does not alleviate cash flow problems for most businesses in trouble. Deferral of tax payments alleviates short-term pressure but in the longer term it may put businesses in a more difficult position, with accumulating tax arrears. The tax system already had significant uncollected debt before the crisis.

For workers, although the personal income tax system could deliver tax refunds after June 30, this would be too late. Instead, the JobKeeper package will adapt the tax system to deliver subsidies to workers via employer intermediaries – to as many as six million potential recipients. That is nearly half the working population of the country.

The JobKeeper package is possible because of single touch payroll, a data system fully operational only since July 2019 for small employers (19 or fewer employees), earlier for larger employers. It provides real-time wage data to the Australian Taxation Office and this will be used to calculate the subsidies.

There is little detail available, and legislation will be needed – Parliament is to be recalled on Wednesday. It seems that the government may adapt the business activity statement (BAS) usually used to pay income tax and GST, to pay the subsidy to employers which meet the reduced turnover requirements. The subsidy relies on employers to make those payments to workers. Some of the gaps and oddities in the Jobkeeper subsidy design might be driven by the challenge of payment delivery through the tax system.

Our tax and transfer systems are high quality, so this re-targeting of the systems should work, but it is not without risks. The recent robo-debt scandal, which got many debts wrong because the algorithm used to identify the “debt” was unlawful, presents a lesson.

How do we pay for it?

The government first needs to ensure that our economy rebounds – and, in time, we need to pay for these necessary governmental interventions.

In the short term, the much vaunted fiscal surplus will disappear; there will be a large fiscal deficit, funded by debt. In MYEFO, gross debt was estimated at $556 billion, or 28 per cent of GDP; the COVID-19 package may increase this to 40 per cent of GDP. Scott Morrison says it could take years to repay, but this is far lower than debt of many comparable rich countries, even before COVID-19. Drastically cutting expenditure and welfare payments, after the crisis is over, would put longer-term recovery at risk.

Importantly, we need to secure our tax capacity with carefully planned incremental tax reform to broaden the base and close loopholes. The 2024-25 stage three personal income tax cuts were never good policy and seem foolhardy now. Younger workers are bearing the economic brunt of the crisis, so we need to fairly tax capital and assets. We also need to deliver a business tax system that will position Australia well in the context of a slowly recovering global economy. Funding both crisis response and recovery is feasible if we can ensure a resilient tax system.

This is an updated version of a piece first published at the Australian Financial Review under the title “Canberra must create a huge new welfare-state system” on Wednesday 1 April 2020.


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