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JobKeeper Protects Businesses, But For How Long?

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by Matthew Barry
Jul 20 2020

The JobKeeper payment scheme has provided critical support to over 870,000 Australian businesses since its implementation in May 2020. However, the scheme has also propped up struggling businesses, that would normally have failed under usual operating conditions. The looming withdrawal of JobKeeper from September onwards represents a major threat to many firms, which are not yet prepared to confront current economic conditions without government protection.

‘The scaling back of wage subsidies is expected to ramp up business bankruptcies and unemployment. The lockdown restrictions and ongoing economic disruption caused by COVID-19 has put pressure on the government to extend the JobKeeper scheme,’ said IBISWorld Senior Industry Analyst, Matthew Barry.

This week, the Federal Government is expected to announce an extension of JobKeeper through to March 2021.

JobKeeper expiry

Businesses are expected to downsize their labour forces if JobKeeper payments end in September, in an effort to limit operating costs while demand conditions remain weak. Even with an extension of JobKeeper, the national unemployment rate is anticipated to rise from 5.5% in 2019-20 to 8.4% in 2020-21. Business confidence and consumer sentiment are both projected to remain negative in 2020-21, as the impact of COVID-19 fully materialises.

According to the latest ABS Business Indicators survey, 29% of businesses currently do not have enough cash on hand to last longer than three months. Close to 66% of businesses are generating less revenue in 2020 relative to the prior year, with only 8% reporting revenue growth.

Zombie companies

Unlike prior recessions, the rate of bankruptcies has declined since the COVID-19 outbreak, as a result of ongoing generous government support.

‘While JobKeeper has provided support to businesses that would be thriving in a world without COVID-19, it has also propped up businesses that would have otherwise failed by now under normal operating conditions,’ said Mr Barry.

The lack of business bankruptcies since the COVID-19 outbreak has hindered demand for bankruptcy services provided by the Legal Services industry and Accounting Services industries. This has contributed to a decline in industry revenue of 2.5% and 2.3% respectively in 2020-21.

‘Since the first JobKeeper payment in May 2020, the number of businesses entering external administration has declined by approximately 45% year on year. Once JobKeeper is removed, the number of businesses entering external administration is likely to spike,’ said Mr Barry.

JobKeeper extension

From September 2020, the JobKeeper scheme will likely be tailored to match the unique needs of sectors and industries, rather than providing a one-size-fits-all approach across the economy. The speed at which industries recover from the effects of COVID-19 is likely to determine the level of government support.

‘The International Airlines and Tourism industries are not expected to be operational for the foreseeable future, due to ongoing travel restrictions. An extension of a more targeted JobKeeper scheme could be one strategy for the Federal Government to support industries that take longer to recover,’ said Mr Barry.

The second wave of infections concentrated in Victoria is expected to contribute to a greater need for government wage subsidies until 2021.

The long-term cost of JobKeeper

The cost of the JobKeeper scheme, as well as other government stimulus measures, is expected to hinder government expenditure in years to come, as funds will be required to pay off the significant budget deficits incurred during the COVID-19 pandemic. The budget deficit in 2020-21 is anticipated to be in excess of $200 billion. Total government debt was $684 billion in June 2020, up from $542 billion in June 2019.

The Australian Treasury advised the cost of the JobKeeper scheme would total $70 billion this year. Extensions to JobKeeper will further inflate this cost. The Federal Government is considering bringing forward tax cuts to 2021-22 and 2023-24, which will put additional pressure on government finances.

‘Interest rates remain at historic lows, enabling the government to cheaply borrow necessary funds to support Australia through the COVID-19 pandemic. One major legacy of the pandemic will be the significant tax burden that will need to be repaid by future generations,’ said Mr Barry.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647
Email: jason.aravanis@ibisworld.com