The price of lock down
Amid another wave of COVID-19 in the state, Victoria has had to shut down its economy once again. The cost will be larger and the recovery longer.
On 6 August, Prime Minister Scott Morrison did not mince his words when he shared Treasury estimates of the economic effects of additional restrictions in Victoria for six weeks in August and September.
“This is a heavy blow,” he said.
Heavy indeed. Just when the state was showing signs of finding a pathway to economic recovery, it has been dealt a second blow, much harder than the first. Treasury estimated the size of the real economy in the September quarter would be reduced by between $7 billion and $9 billion. Eighty per cent of that cost would come from within the state boundaries.
Instead of the previously forecast peak of 9.25 per cent, unemployment is predicted to top out at around 10 per cent. The real worry, according to the Prime Minister, was the level of effective unemployment, which he said would increase by 250,000 and 400,000 to rate “in the high 13s”.
“We know the measured headline of unemployment rate does not tell the full story of what’s happening with people’s jobs, and I have been very candid with people about that,” Mr Morrison said.
“Now, that isn’t necessarily people who have lost their employment, but it also includes those whose employment has been reduced to zero hours.
“But as I said, the effective unemployment rate is the one we’re watching.”
AMP Capital chief economist Shane Oliver estimates the economic cost to be even higher by attempting to factor in the three-and-a-half weeks Melbourne was in a stage 3 lockdown preceding the city’s escalation to stage 4.
“Based on New Zealand’s experience with a stage 4 lockdown and allowing for the fact that Victoria had never fully recovered from the initial lockdown, we estimate that this will cost the Victorian economy around $12 billion to $14 billion,” explains Mr Oliver. “This is up from an initial estimate of the cost of the stage 3 lockdown of Melbourne of $5 billion.”
Before the lockdown, the federal government’s economic and fiscal update in July projected a deficit of $184.5 billion for 2020-21. Even then, Mr Oliver thought the projection was too optimistic, saying softer revenue and more stimulus than the government was allowing for meant the projected deficit is closer to $220 billion. With the lockdown measures, he sees the deficit this financial year being closer to $235 billion. Even then, he qualifies that prediction by saying to treat it “with greater than normal caution given the uncertain economic outlook”.
But despite the dizzying levels of stimulus leading the largest deficit and debt blowout since the Second World War, Mr Oliver says the economic outlook would be much worse.
“[The stimulus] is made viable by ultra-low interest rates, Australia’s low starting point deficit and debt levels compared to other advanced countries and Australia’s lack of reliance on foreign capital,” he says.
Staying financially afloat
The flow-on effects to the COVID response of the federal and Victorian governments has been swift and immense, the lockdown piling on more pressure to provide additional fiscal stimulus. Until the second wave hit, much of the stimulus had built-in assumptions around COVID outbreaks being under control and Victoria emerging from lockdown in the middle of August.
Given how the pandemic has played out not just in Australia but globally, it is safe to say those assumptions were premature.
On the federal government front, it has had to tinker with the second iteration of its JobKeeper program by adding an extra $15 billion to the scheme. Further, it announced an easing of the eligibility requirements, whereby businesses will only need to show that their GST turnover had fallen in the quarter ending in September to qualify for the scheme’s extension.
Treasurer Josh Frydenberg said while the changes will apply across the country, the Treasurer has said he expected $13 billion of the $15 billion allocated to go to Victoria.
“We believe that about 530,000 extra Victorian employees will now join the JobKeeper program over the September quarter; that means 1.5 million Victorian employees will be using JobKeeper,” Mr Frydenberg said. “That’s nearly half of the private sector workforce across the whole state.”
One of the major factors behind the exponential spread in Victoria has been individuals who have been COVID-positive but still went to work while infectious due to a lack of sick leave.
In response, the federal government announced a paid pandemic leave disaster payment that would apply to states that declare a state of emergency, such as Victoria.
Under the policy, workers with no sick leave available to them would be eligible for a $1,500 payment for the fortnight they would be required to be in isolation.
Prime Minister Scott Morrison said the payment would be modelled on the exact same set of criteria that the Victorian government has put in place for its paid pandemic leave scheme.
“Those payments are principally made to those who are on short-term visas who otherwise wouldn’t have accessed Commonwealth payments,” Mr Morrison said.
“We will make sure that everyone else who finds themselves in this situation, and they don’t have that leave available through their sick leave because it’s been exhausted, will get a $1,500 payment for that fortnight.”
As for Victoria, its government put out a business support package of over $534 million to cushion the blow of the second lockdown on top of the $6 billion it has already provided in economic relief since the start of the pandemic in March.
In addition, the state has extended the ban on rental evictions and rent rises until the end of the year. Victorian Treasurer Tim Pallas says the measure will provide certainty to thousands of struggling businesses, and has been viewed as a life raft for thousands of Victorian small businesses.
“Nobody should be worried about losing a roof over their head right now, particularly given the circumstances around social distancing,” Mr Pallas says.
“But also, the associated economic consequences of the pandemic event that the entire world is confronting.
“We need to provide certainty to people who lose their homes or their businesses, and we need to help tenants and landlords find some common ground.”
The mental health battle
The economic costs of lockdown will be immense for small businesses right across Victoria, especially for those that were just beginning to find their feet again.
But while the financial effects are huge, it is the mental health impact that will most likely hit small businesses even harder. Even worse, unlike economic costs, which can be estimated with a quantifiable figure, the mental health effects will be much harder to measure.
In recognition of the immense impact, the Victorian government allocated an additional $60 million to the state’s mental health system. The investment would be aimed at strengthening the surge capacity of clinical and community mental health services across the state to cope with additional presentations and reduce pressure on hospital emergency departments.
For small business owners, the Victorian government also partnered with the Victorian Chamber of Commerce and Industry to launch a $10 million business mentoring program, matching small business owners and sole traders with experienced professionals to help them to adapt their businesses and strategies.
That is on top the $26 million wellbeing program in collaboration with St John Ambulance. Under the program, the first aid provider would give accredited mental health support training to chambers of commerce right across the state.
According to the Australian Small Business and Family Enterprise Ombudsman Kate Carnell, the enormity of the second wave of lockdown and the psychological distress it is causing for small-business owners cannot be underestimated.
“Given small business loans are often secured against the family home, the stakes are incredibly high and that is understandably taking a huge toll on small business owners’ mental health,” Ms Carnell says.
“The Victorian government is responding to the needs of the small business community, including sole traders, who will require ongoing mental health support for the duration of this crisis. This will save lives.”
Finding a path to recovery
However, many businesses have been unable to keep operating and have closed permanently despite the range support measures introduced and implement by governments at all levels. According to the Institute of Public Accountants (IPA), support for many small businesses will still be required leading up to and throughout the recovery phase.
“This support must also test the viability of a business to determine whether it can be resurrected or alternatively assist it to exit the market in advance of insolvency and bankruptcy which can have a detrimental impact on the business owner’s mental health and wellbeing,” the professional accounting body said.
“To assist in recovery measures or closures, access to professional advice is essential.”
The IPA said government support in the form of a grant or other mechanism to enable businesses impacted by the pandemic to access professional advice is urgently required, putting it in line with the COVID-19 Recovery Plan put forward by the ASBFEO Kate Carnell.
“The ASBFEO recommendation has two components: the first allows for an amount of up to $3,000 for advice from a professional (accountant) to assess the current financial position and viability; the second, includes $2,000 for insolvency advice if the business needs to be wound up based on its non-viability.”
Another example of support suggested by the IPA to help access professional advice is Tasmania’s Business Continuity Grant designed to help a business fund accounting, legal or business planning advice.
“Accountants as trusted advisers have been key to the successful implementation of the federal government’s major stimulus packages including JobKeeper and JobSeeker,” it said.
“They have assisted clients to navigate and access the funding support to sustain operations during the peak of the crisis. With the government’s initiatives flowing via the tax system, accountants have been the first port of call for thousands of businesses.
“Even though this has been a huge increase in their workload, many IPA members have advised they are under constant pressure from clients to either waive or reduce their fees, with some work being simply unbillable. This in turn has placed significant pressure on their own survival.”
The IPA said it is likely that accountants will be required again to support clients through the recovery period and beyond, and that not all small businesses will survive the impact of the pandemic on top of the extensive bushfire season in large areas of the country that preceded the pandemic.
However, it advised that to provide businesses with the best opportunity to recover or to make the assessment to exit, many will require advice and guidance from their professional and trusted adviser.
Tegardless of how Victorian small businesses forge their path to recovery, much like the rest of the country (and the world), the road was always going to be a long one with or without a second wave. Fingers crossed the second lockdown will be the state’s last big hurdle in this crisis that has devastated so many.