By Shir Rosenberg
What is a Stimulus Package?
A stimulus package refers to when the government increases spending or lowers taxes and interest rates in order to stimulate an economy out of a recession.
The 2020 Stimulus Package in Australia
In light of the current COVID-19 crisis, the Australian government has issued stimulus packages worth an unprecedented sum of $213.6bn to support workers and local businesses.
The package has been issued in various forms:
- Recurring $1,500 JobKeeper payments to employers,
- Wage subsidies for local businesses,
- Payments of $750 to welfare recipients and
- Jobseeker payments of $550
What are the Effects of Stimulus Packages?
While they may be beneficial in the short-term, stimulus packages may do more harm than good in the long-run.
One reason is that government deficits are generally funded by debt, which will later need to paid back with interest. To decrease its chance of defaulting, a country needs to have a low debt-to-GDP ratio – i.e. it needs to produce more than what it is owed.
An increase in dept-to-GDP ratio not only means the country is less able to pay off its debt, it also can spur an increase in interest rates, which will make it more costly for businesses to obtain financing necessary for their own investments – thereby hurting the country’s future economy.
Is COVID-19 Exacerbating the Situation?
The current requirements of social distancing and isolation are leading to decreased spending, as people are encouraged to avoid going out unless necessary. Unemployment is also on the rise, as local stores are not generating enough business to remain open or keep their employees. The current unemployment rate is forecasted to double over this quarter, making it the highest it’s ever been in Australia for the past few decades. This restricts the economic output and increases Australia’s debt-to-GDP ratio, which as aforementioned, will result in negative long-term effects. However, had there not been any JobKeeper payments or wage subsidy programs initiated by the government as part of the stimulus package, the unemployment rate would have reached uncharted territory, leading to worse outcomes.
A negative side-effect of the package to also consider is the risk of inflation. As money is being poured into our economy with essentially no beneficial output method and going towards essential goods and services for unproductive consumption, the increase in spending inefficiency accentuates the effect of the money-supply pump in the short-term.
Although there are yet to be any major inflation rate spikes, it is forecasted to increase over the next couple of months.
Some products are also experiencing unusually low prices such as petrol, whilst other necessities are costing more due to high demand. For example, there is an evidential spike in the costs of toiletry products, such as toilet-paper and hand sanitizers. The panic-buying of groceries has also caused major price hikes for fruits and vegetables – up to almost 60%!
Sources: NAB, ABC, ABS, RBA, The Guardian
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