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Executive Summary

Coronavirus has taken the world by storm and affected the economy all over the world. It was sometime back assumed that this is going to be the history repeating itself like the ‘Spanish Flue’ of 1928-30 and the following Great Depression. The report analysis the impact of coronavirus on the economy of Australia and the measures taken by the government.

It is observed that Australia went into recession with decline in the GDP after continuous growth of 28 years. The first quarter of 2020 faced the contraction in economy by 0.3% and slowed economy growth from2025 in 2019 to1.4% (Reuters, 2020). 

Anticipating a worse situation, the government of Australia came out aggressively with various grants and measures to support the households and business. The attempts were made to maintain the aggregate demand in the market. The grants when compared with USA shows that Australia used more direct approach to support the business and households as compare to USA which used more indirect approach. 

The grants and measures were able to act as shock absorbers but it is observed that the economy shrunk again after sometime. The reason for this is that the measure planned and initiated by the governments are good for short term but considering the inconsistency and uncertainty around the pandemic the governments need better plan and policies. The economists has put forward the three phase activity plan for the governments to face the situation and come out as winner.

Macroeconomic Performance and Social Impact 

The macro economic performance of Australia during the time of COVID -19 and the steps taken by the government to overcome the negative effect are discussed as under.  The four federal grants are discussed in detail with their impact on the economy of the country. The steps taken by USA to beat the COVID-19 impact are also analyzed and compared with Australian Government.

Impact on Australian Economy  

 The Australian economy is considered to be the only economy of the OECD country to have experienced the uninterrupted growth for 26 years in continuation. The country did not enter into recession   and held one of the highest growth rates. The COVID-19 outbreak has affected the world economy in the worst manner leaving Australia even (NordeaTrade.com, 2020). The economy of Australia observed the sharpest decline since the Great Depression of 1930. The Australian Economy shrank by 7% by June 2020, the first contraction in economy since 1959 (Zeeenews.India.com, Sep 02, 2020).  The Real GDP of the country in 2020 is expected to decline to -4.2%

Source: (IMF.org, 2020)

Government Grants

The Australian Government has issued many Grants and support packages to respond to the coronavirus to make the economy resilient.  As of October 22, 2020, the Australian government had revenue measures worth A$272.3billion being 14% of the GDP till FY 2023-24 (IMF.org, Oct 2020).  The grants incudes payment to households, businesses to retain the jobs, dependent people, child care, withdraw of superannuation early, etc. Some of the grants are as follows:

1. Job keeper payment: In case the business of a sole trader or a not –profit organization and the business is significantly affected byCOVID-19, the business can sought from government in form of job keeper payment. The grant helps the business to continue paying the employees so that the job of people is not lost and unemployment is not increased. The scheme has now extended until March 28 2021. The schemes has two tier rates.  Tier 1 for employees who has worked for 80 hours or more for four weeks in the pay period from 1 March 2020 and1July 2020 and Tier 2 rate for any other employees. The rates for Tier 1 are $1200 per fortnight and $750 per fortnight from 28 September to 3 January 2021 and $1,000 per fortnight and $650 per fortnight from 1 January 2021 to 28 March 2021 (Business.gov.au, 2020). 
2. Cash Flow for Employers: The grant from Australian Federal Government will give $10,000- $15,000 to the business with an annual turnover of up to $ 50m. The amount will be equal to the salaries and wages taxes withheld being $10,000 as minimum amount and $50,000 as maximum amount.
3. Federal Childcare Support: The grant is issued by Australian Federal Government. The grant is effective from August 6 2020 and is there for at least 6 weeks. It will allow a total of 72 days allowable absences, the providers guaranteed income from childcare subsidy and in addition 25% of their total revenue and fees from permitted workers parents (KPMG, 18 sep.2020).
4. Home Builder: The scheme provides the eligible owner –occupiers of the house the grant upto $25,000 to significantly renovate the existing home and build a new home. The scheme is aimed at improving the demand in residential construction market (Treasury.gov.au,2020) 

Impact of Grants

The impact of these grants on the Australian economy is slowing down of the recession and maintaining the aggregate demand in the market. The measures of government has helped in reducing the stress on households and reduce poverty. Prior to covid the average poverty gad was observed to be $593 per year which was expected to increase to $1,685 per year (Philllips, Gray & Biddle, 2020). However the grants and stimulus provided by the government has reduced the gap even to lower than pre- covid times.

 In absence of these grants the gaps would have increased to unprecedented levels. The comprehensive programs of Australian tax and transfer system seem to keep the level of poverty in control in the country and maintain the demand in the market seemingly making it easier for the economy to bounce back soon.

Comparison with USA

The response of USA to COVID-19 is compared with the Australian Government.

Government Grants By USA 

The US Government has many grants and economic benefits to individuals, business and household. Some of the grants/benefits are as follows:

1. CARES Act- The government formed the CARES Act – Coronavirus Aid, Relief and Economic Security Act.  The act provides the emergency aid of about $2 trillion to individuals and business. The aids are in form of direct payments, lower interest rate loans and insurance benefits. Some of the benefits in the act are the commercial paper funding facility – allowing the business to purchase unsecured and asset supported commercial paper to fund their business operations, primary dealer credit facility – to provide additional funding and term loans to the business for small duration like 90 days to 6 months. These can be used to pay the salaries of the staff and meet their expenses 
2. American Workers paid and Employed Act – Under this act the government of USA provides $349 billion for small Business Administration in form of loans and funds. This will help the small business borrowers and lenders to pay the salaries of the employees, to pay their insurance premiums, loans and mortgages and other utility payments (KPMG, 14 Oct, 2020).
3. Payment by IRS- IRS in the country are making direct payments as support for COVID -19 to  the tax payers and on registration to the non-tax filers. There are increased exemptions from paying tax and filling returns (IRS.gov, 2020). Some individuals like the Retired people, social security holders have received the payment of $1200 for themselves and can register for the payment for their spouse and qualifying children. 

Comparison of Australia and US Grants

Almost all the countries across the world has come up with grants and coronavirus packages to support the economy of their country.  The main objective of these grants and packages is to retain the confidence of the consumers and maintain the aggregate demand in the market. This will help the business remain in business and keep operating. The top 20 countries spending as part of COVID-19 response are as follows:

USA has the spending of about $964 in Handouts s compared to Australia which is not general but to eligible individual.  The comparison of the schemes offered by the two countries is that where Australia has taken more direct approach to support the business and individuals by making direct payment, USA has taken more indirect approach by providing more of subsidized loans and credits to the business and waiver from repayment of loans if they retain the staff (BBC News, 7 May 2020). 

Impact of Grants On Demand - USA

There is no doubt that the grants and government interventions have helped the countries maintain the demand and keep the business going. 

The review of the economy in USA  has indicators showing that the demand across the country in various economic activities  has started slowing down in the beginning of March 2020whne the international travel restriction were placed by the country. There were social distancing measures taken in some high risk prone states which lead to slowing of the economic activities in the places.  The daily spending of the people from credit cards were observed to be reducing since mid-March 2020. The trough or the lowest level of economy slowdown was reached in April in USA. It was on March 27, 2020 the CARES Act was introduced and signed (CEA,2020).  

There was observed liquidity crisis in business leading to solvency crisis gradually.  There was a wave of bankruptcies, increasing unemployment and low levels of production levels. The above table shows that the demand has increased gradually after the CARES Act has been introduced. The timely response of the government provided support tote households and business a passage to avoid the deep financial crisis. The restriction put by the government have also started to reduce gradually and hence helping the economy and demand to bounce back.  Soon after the CARES Act was introduced the S&P 500 rose by $2.6 trillion or 13.3 percent in the week from March 23 to March 27 2020.  However it is observed that not all industries are reacting to the grants, stimulus and supports in the same way. The aviation industry, the hotel industry and small time hourly employees are still in shock.  

Impact of Grants on Demand – Australia

Australia was among the countries which started early response to Coronavirus.  The country started the response in January 2020 by listing the disease under the Biosecurity Act 2015. Travel restrictions were imposed in early March and social distancing norms were imposed strictly. The actions though protected the country from severe attach of the virus it affected the large part of economy with closure leading to risk of imminent economic crisis in the country.  The first COVID-19 stimulus was announced by the Australian Government on March 12 2020 to support the economy of the country. The two main grants/response by the government were Job Keeper and Job seeker programs. Gradually more programs were initiated by RBA leading to a range of monetary policies. The interest rate is at 0.25% in the country which is at its historic low. 

The key indicators shows that despite the string economic measures taken by the government and RBA in the earlier days, there is a slump in the economic activity of the country.  There was contraction of just o.3% in the GDP with the annual growth of 1.4% in first quarter of 2020 (Higginson et al. 2020).  However it cannot be denied that there has been some correction after the induction of the government grants, which can be seen in the chart below.

The economic activities went steep downwards in the month of March and Aril and revived suddenly in May after the grants and stimulus. Though the decline is till observed in the month of June 2020.  The RBA had estimated that there will be the contraction of GDP of about 6-7% in 2020n due to COVID-19 and the economy of Australia will return at 5% in 2021. The estimation is highly dependent upon the response of market towards the fiscal policies and most importantly the containment of virus. It is expected that the gross Debt of Australia will reach 40% which is still very less than many other nations in world. The data shows that Australian nation Accounts have a favorable Balance of Payments (BOP) position till date. Standard & Poor’s credit rating for Australia still remains at AAA (Higginson et al. 2020).

Thus it can be said the grants and measures taken by the government in Australia as well as USA led to immediate upswing in the economy but it did not sustain and the economy started to decline again in following months. However it cannot be declined that the financial supports and measures taken by the government did provide the much needed support to increase the aggregate demand and bring economic activities back. 

Conclusions  

The study and research on impact of coronavirus on the economy and demand of Australia shows that the country has faced the decline in economic growth for the first time in last 28 years. The country has introduced aggressive economic stimulus to keep the economy of the country string. The comparison of government grant when compared with USA shows that while Australia had more direct approach in supporting the business  through direct payments; US has an indirect approach to support the business by providing loans and credits at low interest rate and even waiving them if the employees were retained by the business. 

However the debt position of Australia is still better than most of the countries and it has been able to retain its credit rating at AAA and has been given the stable outlook by Moody’s investor service. 

The grants and economic measures taken by the government of various countries are being viewed as much needed respite in the current scenario. However there are certain economist who are of different view. The paycheck protection programs are in lots of demand but at the same time it is also argued that that the large companies are making use of the funds which was supposed to be set aside for small business. Some business cries out that the government is supporting the salaries and ways of employees while it is other cost that poses a higher burden to the business. 

Recommendations

Thus the subsidies and grants in the form of salaries and wages to employees are good only if this is for a short span of time. However these strategies will not be very effective if it is going to be for a long term. The biggest challenge today is that it is not known for how long the COVID-19 situation is going to last.  Considering this uncertainty it is important that the government plan the short term and long term strategies. 

The government will have three phases to pass though in these COVID times. The first phase is responding. It is the short term strategies of the governments should be more towards promoting safety and continuity by responding to the uncontrollable situation.  The phase two being recurring, the medium term strategies should be an attempt to provide flexibility to the economy and business. And phase three of thriving should be long term strategies where the governments should target at enhancements to public sector and laying better foundation for future activities.  The government activities can be explained in the following chart by Eggers et al. (2020).

It is important the government makes the shift to the next phase on a timely manner and is not struck in just responding to the crisis.