economists on why it’s dangerous to cut the coronavirus supplement

frank lampard

© Provided by The Guardian Photograph: William West/AFP via Getty Images The Morrison government has announced changes to jobseeker that will cut the $550-a-fortnight coronavirus supplement to $250 from 28 September, reducing the total jobseeker payment for about 1.6m Australians from $1,115 to $815 a fortnight. Experts say the supplement […]



a group of people standing on a sidewalk: Photograph: William West/AFP via Getty Images


© Provided by The Guardian
Photograph: William West/AFP via Getty Images

The Morrison government has announced changes to jobseeker that will cut the $550-a-fortnight coronavirus supplement to $250 from 28 September, reducing the total jobseeker payment for about 1.6m Australians from $1,115 to $815 a fortnight.

Experts say the supplement has been vital in raising many Australians, including children, out of poverty for the first time. Its effect on the economy has been positive, with the extra $663m in cash being spent by consumers supporting small business, as well as keeping the housing sector afloat by allowing people to keep up rent and mortgage payments. And it is popular: most Australians are opposed to reducing the payment.



a group of people standing in front of a building: ‘It is no revelation that the old rate of Newstart is woefully inadequate,’ says Australia Institute economist Matt Grudnoff, as the federal government slashes the jobseeker payment.


© Photograph: William West/AFP via Getty Images
‘It is no revelation that the old rate of Newstart is woefully inadequate,’ says Australia Institute economist Matt Grudnoff, as the federal government slashes the jobseeker payment.

But there has been pressure from the coalition backbench and some business groups to lower the rate, claiming it acts as a disincentive to work.

Even the prime minister, Scott Morrison, has argued there is “anecdotal evidence from small businesses, even large businesses” that “some are finding it hard to get people to come and take the shifts because they’re on these higher levels of payment”.

We asked economists about jobseeker, whether it should be maintained at $1,100 a fortnight and whether there was any evidence a higher level of payment does act as a disincentive to taking up work.

Too early to cut back but time to target families

At the start of the pandemic, the government went big and quick with the jobseeker and other schemes to support incomes. In a state of emergency, this is what was needed to ensure that people losing their job would be able to keep a roof over their head and provide for their family. This also supported consumption from those with the highest propensity to consume and in turn businesses, especially small local businesses hard hit by the pandemic.

Questions are now asked about whether the amount provided is too much, acting as a disincentive to work. This is a relevant question if we can reasonably expect people on jobseeker to go back to work – that is, if there are enough jobs to go back to. With many industries still at a standstill and others in slow motion, Victoria in lockdown and NSW in a shaky situation, it seems September will be too early to cut back on the safety net provided as part of the pandemic response.

Related: Coalition to overhaul jobkeeper and jobseeker Covid-19 subsidies by cutting support rates

The risk in reducing this financial support too early is to let some Australians fall into poverty and increase the rates of mental distress that have already doubled since the start of the pandemic. In this context, it is not clear that cutting back on jobseeker would generate savings for the government in the long run.

However, now that the emergency situation has settled a little and the pandemic looks like it is going to stay for some time, it is a good time to think more carefully about how to target jobseeker to provide amounts commensurate with needs. The increment for parents is very small and does not increase with the number of children. Parents, and particularly unemployed parents, are experiencing extremely high levels of financial stress that will have long-term consequences on them and on their children. Rethinking the distribution of the payment in favour of families potentially has large long-term benefits.

Look at effective marginal tax rates instead of cutting jobseeker

The current base rate ($550 a fortnight) is around 40% below the poverty line for a single person. Are we really arguing that there is an incentive to being in poverty, or that the problem at the moment with the effective unemployment rate above 10% is that people don’t want to work?

As I noted last week, the fact the government felt it needed to add the bonus highlights that the old rate was too low to act as an automatic stabiliser and too low to allow people to live with dignity and to properly look for work. How can you really look for work when paying for internet or a phone or public transport is a stretch?

The talk about employment deterrence needs to be less about the maximum rate and more about the effective marginal tax rate of going off jobseeker. This is all about the taper (how much you lose per dollar earned) and also the interaction with other payments such as rent relief, childcare subsidy and so on.

Going forward I would look at a total jobseeker payment of at least $900 a fortnight that reduces by 65 cents for every dollar earned over $250 a fortnight. That would see the amount reduced to zero when you earn around $1,500 – just below the minimum wage, and much more fair.

A $100-a-week rise is not extravagant

The old Newstart allowance rate – around $287 a week, including the energy supplement – was unconscionably low. It’s well below any measure of adequacy you care to choose: the OECD’s relative poverty line, the Henderson Poverty Line, and estimates of the budget needed to meet basic needs. It’s the least generous unemployment benefit in the developed world for newly unemployed people. Jobseeker must not return to that old, inadequate level.

There’s no magic formula to tell us how high the unemployment benefit should be. We need to protect people from poverty – the reason the payment exists – but also take into account the cost of the program and the prospect that if the payment were increased beyond a certain level, people might be discouraged from looking for work.

The Grattan Institute has recommended that the government increase the jobseeker payment by at least $100 a week when the coronavirus supplement is withdrawn. We’ve also recommended that commonwealth rent assistance be increased by 40%, which would lift the maximum payment by $28 a week.

A $100-a-week rise is not extravagant. It would leave Australia’s unemployment benefit as one of the lowest in the OECD. A $100-a-week rise would take the benefit back to roughly where it was in the early 1990s, as a percentage of the median full-time wage. And the payment should be benchmarked to wages to prevent it ever falling so low again.

There’s little chance that such a modest increase would lead to people choosing the dole over work. Recent research suggests any disincentives to look for work from more generous unemployment benefits are largely offset by the boost such payments provide to employment by lifting economy-wide demand.

If the payment went back to Newstart levels, people wouldn’t have enough to meet their basic needs, including the cost of searching for a job. That’s why the OECD said Newstart might be so low that it undermines job search – and that was a decade ago, when the payment hadn’t fallen quite so far behind wages and pensions.

This is a price the budget can absorb

The increase in jobseeker payments forced on the Morrison government by the deep recession has seen two benefits: it has helped people in poverty or at risk of falling into poverty from the lack of paid employment to improve and establish a level of financial security that supports their dignity in their personal crisis; and, at the same time, has provided support to the broader economy through a simple fiscal stimulus measure exactly when it has been needed.

A permanently higher jobseeker payment than the rate prevailing prior to the Covid-19 pandemic will continue to provide those benefits, albeit at an ongoing cost to the budget. This is a price the budget can absorb not just in the current recession, when the number of jobkeeper recipients is high, but also when the economy recovers and eventually returns to full employment.

Related: Axing jobseeker Covid-19 payment would push 650,000 Australians into poverty, thinktank reports

The magnitude of any increase in jobseeker needs to be carefully set – giving enough financial support to ensure the unemployed live with dignity, have the financial status that reduces the risk of entrenched poverty and allows them the look for paid work but with an eye to the risk, however slight, that a payment set too high will deter some from seeking paid work. It is important to understand that there is a well-established link between the level of unemployment benefit payments and incentive to work.

Which is why a less draconian (more generous) level for jobseeker payments should be best implemented with interlinked policies that include enhanced skills training for recipients and a sustained strong economy that generates plenty of jobs, especially in sectors with decent pay rates.

Decent support better enables people to seek employment

Over the past 25 years, the Newstart/jobseeker allowance has fallen by 40%, relative to the aged pension. This is because increases have been tied to inflation, rather than wages growth. There has been a strong ideology, from both major parties, that people on unemployment benefits somehow don’t “deserve” more, or that increasing the rate will cause disincentives to work. It has taken a pandemic-induced recession for there to be greater clarity and urgency around the call from some – including Deloitte Access Economics – to raise the rate.

Stories from the frontline of those living on benefits can read like something out of a Dickensian novel. Stories of missed meals, inadequate heating and homelessness are not uncommon.

There is absolutely no doubt that the jobseeker rate needs to be permanently increased, and that additional, meaningful support should be out in place for the long-term unemployed to help them gain skills, where that is possible.

Identifying the correct rate is a little harder. Too low, and there will be minimal impact; too high, and you risk providing a disincentive for some to seek work. With the minimum wage somewhere close to $750 a week, jobseeker could easily be raised by $100 a week, and possibly more.

Not only does a decent support level provide individuals with greater dignity and physical and mental wellbeing, but it also better enables them to seek new training and employment opportunities. Our modelling has shown that an increase in the rate also provides broader economic gains, including an uplift in economic activity and jobs, particularly in highly disadvantaged areas.

Do we really want to push children into poverty?

The government should be proud of the fact that it effectively doubled unemployment payments in late March with the coronavirus supplement. Australia Institute research shows that this one act lifted 425,000 Australians out of poverty. However, ending the coronavirus supplement would push 650,000 Australians into poverty, including 120,000 children.

Do we as a wealthy, developed country really want to push so many children into poverty?

It is no revelation that the old rate of Newstart is woefully inadequate. Everyone from the Business Council of Australia to the Australia Institute, former prime minister John Howard and the Australian Council of Social Service says it needs to increase.

There has been no real increase in unemployment payments for a quarter of a century. In fact, Newstart had fallen so far below the poverty line that the much-touted increase of $75 a week would still force 500,000 Australians into poverty – including 90,000 children.

While there are many figures being touted in the media – including Jennifer Westacott from the BCA, who has called for the aged pension as a useful starting point – this would equate to an increase of approximately $190 a week. I would hope that what all Australians can agree on is that after lifting so many Australians out of poverty with the jobseeker coronavirus supplement, the government should not be forcing anyone back into it.

Cutting the coronavirus supplement is not just devastating for the individuals who rely on it to survive. It will have a detrimental effect on the wider economy. We know that low income earners are the best people to target stimulus at. Halving jobseeker would reduce demand. Less demand means businesses need less workers, which will add to the already swelled ranks of unemployed.

More people being pushed into poverty will also impact the housing market. If the coronavirus supplement is removed, about a quarter of a million extra renters who were not in poverty before the pandemic will now be in poverty. This means they will struggle to make rent payments, putting pressure on the rental market. Those that own rental properties should be seriously concerned about the government’s current plans to scrap the supplement.

Video: JobKeeper, JobSeeker extension ‘assumes economic growth in next quarter’ (Sky News Australia)

JobKeeper, JobSeeker extension ‘assumes economic growth in next quarter’

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