Over the weekend, the Morrison Government unveiled the next stanza of fiscal stimulus; a significant upsizing on the package announced just over a week ago and most likely not the last.

The implication behind this large increase in support ($66b vs. the initial $17b) is clear; the government believes that this health crisis will persist for longer than first thought and have greater economic impacts. To put this stimulus in context, the total value of stimulus under the Rudd government during the GFC was ‘only’ $52b.

The package targets four key areas; payments through the welfare system to vulnerable members of the workforce, support for small business to help survive the next six months, access to retirement savings, and avoiding forced insolvencies. The details of the core elements are detailed below.

1. Payments through the welfare system ($18.2b):

• A $550 per week increase for the next six months for those on a JobSeeker Payment, Youth Allowance, Parenting Payment, Farm Household Allowance or Special Benefit.

• One-off $750 cash payment (on top of the previously announced $750) to social security and veteran income support recipients and concession card holders.

2. Support for Small and Medium Businesses ($31.9b, up from $6.7b):

• Business with turnover under $50m will receive two cash payments equal to 100% of the amount of tax paid on employee salaries, up to a maximum of $50,000 for each of the periods Jan-June and then, July-October. This also includes not-for-profits.

• In addition to these initiatives, the RBA announced last Thursday in excess of $90 billion for a three-year funding facility to ADI’s to support lending to small and medium sized businesses (which connects to the RBA’s support of the three-year bond rate at 0.25% per annum).

• Government will underwrite up to $20b worth of loans to small and medium sized businesses through guarantees of 50% of loan principal. Repayments will be deferred for the first six months and the loans will be for a maximum of $250,000 over three years.

3. Super Changes

• Minimum drawdown requirements for account based pensions will be halved for the 2019/20 and 2020/21 financial years. For example, for those aged between 65-74 years, the minimum pension will halve from 5% to 2.5% of the member's account balance.

• Early release clauses for super have been relaxed to allow those facing financial hardship to gain tax free access to their super balance up to $10,000 per member for each of 2019/20 and 2020/21. The payment will be tax free and not tested for Social Security purposes. There are strict eligibility requirements.

• Deeming rates will be reduced for Social Security income tests, allowing approximately 900,000 income support recipients and pensioners to access a larger payment.

4. Other:

• Insolvency rules have been relaxed, making it more difficult for creditors to force businesses into liquidation and removing the personal liability from directors for trading while insolvent.

Altogether, the value of government stimulus now adds up to $84 billion or 4.3% of GDP. This combines with the RBA’s credit stimulus announced last Thursday. Given the budget was effectively in-balance leading into this crisis, we are heading for one of the larger peace-time deficits in history (as an aside, we expect similar policy action and deficits across the developed world). We continue to think that the Commonwealth stimulus package will ultimately reach well over $120 billion and with a reduction in GDP, this will represent a deficit at or over 10% of GDP. Figure 1 shows you where such government deficits sit relative to the last 120 years, including two world wars. State government deficits need to be additionally factored in.

Separately, State governments are announcing their own support packages for small and medium sized businesses. These initiatives focus on payroll tax. In Victoria, they are refunding payroll tax for 2019/20 for firms with payrolls less than $3m and providing a three-month extension for the 2020/21 year. There are to be two funds of $500m each to support business and workers in seriously affected industries.

The substantial second round of Commonwealth Government stimulus completes the co-ordinated integration of monetary policy with fiscal policy. This is a historically important event which is being repeated in economies around the world. It represents a new chapter in economic policy and probably sees government and fiscal policy take the leading role going forward (having been dominated by monetary policy for the last 35 years). We will comment on this separately as it has implications for the post-crisis investment environment.

The ‘cratering’ of the economy might come to look like a World War, with government resources mobilised across all elements of the economy to address the enemy. Such is our modern world and economy, the efforts are not likely to be as long, but the short term severity much greater. Notwithstanding the short-term 'kitchen-and-sink' being thrown at COVID-19, and assuming reasonable community and business normalisation over the next six months, the duration and depth of fiscal stimulus should not get to the extreme lows of 1918 or 1943. We do see severe recession over the March, June and perhaps September quarters. As already noted, we see the fiscal stimulus over the next two years as needing to be substantially more than this 4.6% of GDP spend – a realistic figure with war time precedence is at least 10%, if not 15%.

The next stage of fiscal support we await is big business, particularly those most impacted by shutdown now and for a period of time – airlines, hotels, entertainment.

A potential silver-lining is the relatively fast response of policy makers compared to a ‘normal’ financial crisis. In a regular downturn or recession, the response of governments and central banks significantly lags the economic data, as they wait to see the severity of the issue before responding. In the case of COVID-19, the high-level health data has led the economic indicators, allowing stimulus to be deployed up to six months earlier than is typically the case. Make no mistake, the government's stimulus actions are significant and unparalleled in peace-time.

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.