Give people and businesses money now they can pay back later

What are the most equitable ways to handle this major short-term trauma?

How can we help business now?

Linda Botterill, University of Canberra; Bruce Chapman, Australian National University; Glenn Withers, Australian National University, and Warwick McKibbin, Crawford School of Public Policy, Australian National University

The novel coronavirus sees Australia facing major unprecedented health and economic crises. The key to preventing a downward spiral of the economy is to avoid a collapse in incomes of newly laid-off workers who won’t be able to afford what they normally purchase, and temporarily closed businesses that will neither be able to pay rents or other fixed costs, nor buy goods and services to trade.

It is likely that once a vaccine is delivered by science, or even before, the economic recovery will begin. Thus the question: what are the most equitable ways to handle this major short-term trauma?

There is an instrument that should be used to add to the size and efficacy of the necessary fiscal boost. Income contingent loans provide extra financial support without threatening future fiscal solvency.

What are income contingent loans?
Most people in Australia would be familiar with our HECS (Higher Education Contribution Scheme) for tertiary education fees. Students take a loan from the government to cover the cost of their university now and pay it back when they are earning over a certain threshold in the future.

In what was a world-first, Australia implemented this style of loan scheme in 1989 and it has now been copied in around 10 other countries.

For those with a HECS debt, when incomes are low in certain periods, such as from unemployment, looking after an infant or caring for aged parents, no repayments are required at that time.

The government gets the money back later when the debtor’s financial situation has improved. This is known as an “income contingent loan”.

How could we use these loans for the COVID crisis?
It’s useful to distinguish three categories of financial stress that have emerged and which an income contingent loan could assist:

1) for individual employees recently, or soon to be, laid off

2) small businesses forced by health rules or insufficient trade to suspend activity

3) large businesses forced by health rules or insufficient trade to suspend activity.

Income contingent loans can be designed for all three cases although each is quite different.

1. Now jobless employees
For employees now jobless, a HECS-type system could take the form of the government providing a fixed payment (for example $5000) per person. Some part of that payment would be required to be repaid according to existing (or new) HECS parameters.

Those people whose incomes do not recover repay nothing, or much less than those who regain their financial security (who would repay fairly quickly). The experience of 30 years of efficient HECS collection, including lessons learned, has shown us this would all be administratively straightforward.

2. Affected small businesses
In the case of an income-contingent loan for business, a different approach should be used, that doesn’t involve personal incomes. What is needed instead is a revenue-contingent loan – a system designed and promoted by Linda Botterill and Bruce Chapman nearly 20 years ago.

The reporting of business revenue is a quarterly legal requirement of business through the existing Business Activity Statement, which is used to collect the GST. Unlike profits, revenue cannot legally be manipulated to suit the timing of repayments. The revenue-contingent loan obligation would be linked to the Australian Business Number.

In the case of a small business, the government could provide a loan that would be capped at a level reflecting a firm’s capacity to repay when revenues recover. This could be a fixed amount (for example 25 per cent) of the average of the past three years of annual revenue.

To minimise the chance of non-repayment, eligibility could be restricted to firms that have a good chance of future solvency as reflected, for example, in them having been around for a fixed number of years (for example three years).

The government would need to set a repayment rate, and past modelling has revealed small rates of say 5-8 per cent of future annual revenues would be sufficient.

To make sure all this would be equitable for business and healthy for future budgets, the government would need to now model different loan amounts, and different collection and interest rates.

Modelling the different assumptions for budgetary planning would be required to be more precise about the policy details.

3. Bigger businesses
In the case of assistance for not-so-small business, the sums of money needed for the current situation necessitate the involvement of the banks in cooperation with the government.

Government is not equipped to take over large-scale commercial borrowing. But a revenue-contingent loan would still have an important role to play in such a partnership with commercial banks for current not-so-small financial borrowing needs.

The arrangement of joint bank and government lending would be the government providing a revenue-contingent loan that is a proportion of the bank loan. The government loan could repay the bank loan in the very short term until business reopens and recovers.

A partnership of this kind would be ideal for business, which then has the capacity to repay the normal loan even when there is no short-term revenue coming in.

It would also be beneficial for the banks, which would then have far higher prospects of full loan recovery. It also provides a future return to the taxpayer for the government support of banks during these difficult economic times.

The provision of income contingent loans to individuals, and the revenue contingent loans for business, would have major potential to sustain the Australian economy during a sharp temporary downturn, while not putting additional pressure on future fiscal solvency. This is a bridge to a sustainable recovery.

The authors are fellows of the Academy of the Social Sciences Australia. However these views are their own and not representative of the Academy.

Linda Botterill, Professor in Australian Politics, University of Canberra; Bruce Chapman, Director, Policy Impact, College of Business and Economics, Australian National University; Glenn Withers, Professor of Economics, Australian National University, and Warwick McKibbin, Chair in Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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    Up front lady
    6th Apr 2020
    No way should money as a loan be handed out. No business wants more debt.
    And money should not be given to the permanently unemployed as nothing has changed for them.
    We should go into full lock down for 3 weeks and get this over with.
    8th Apr 2020
    So you are suggesting that nothing should be done to help the economy functioning? - is that 'up front' or just lazy thinking?
    Cliches and propaganda are totally irrelevant, the economy needs money moving around, or it will die, you can't lock down your pot plants, you have to keep watering them.

    The point of giving the unemployed more money, - aside from the fact that unemployment is caused by government policy and is entirely inadequate for people to survive on, let alone look for non-existent jobs, is that the unemployed will quickly spend their money locally, - that money will move through the economy, - multiplying itself through all the business exchanges, whereas money sitting in a bank account is just a waste of possibilities, - really, money that is not working to increase human economic goals, should Decrease in value, - just as a muscle loses tone if not used and a mind loses capacity if not refreshed with new ideas.

    The last thing we need in a crisis such as the bushfires or Covid-19 is economic Alzheimers/Dementia, and economic rules need to be adjusted to make sure that does not happen.
    6th Apr 2020
    Thing is - a business is a discrete operating entity... it is always on the cards that any largesse shown to a business - $1500 a fortnight for employees etc or interest free loans - could be collected and then the business simply go out of business.

    If a business goes bankrupt - as you all should know by now - many debts are not collected.

    Recent history has shown us that there are many unscrupulous operators out there who will devise a business, even using false employees and false work, to gain government funding - and who will then seek to vanish with the money out of YOUR - taxpayer - pockets.

    Too many possibilities for rorting here.. .. Usual Suspect groups will see this a just another golden opportunity. Since the penalties are ludicrous, even when people are imprisoned, there is little real deterrent - and often the same people arise time and again in the same rorting vein. Only deportation is a final solution for that kind.... or - as mooted yesterday by government etc - it is time that money crime be treated harshly, as it well deserves - and hefty time in prison be the result of a conviction.
    8th Apr 2020
    Karen, small companies more often fail than succeed, but without small companies our economy would slowly wither, big companies become rigid bureaucracies, research would be regarded as unnecessary, - the money better spent on share holder dividends.

    Perhaps your exhortations of violence against the innocent could be better directed to the huge Multinationals in Australia who pay virtually no tax.
    They are the ones needing deporting imho, - and no wasting resources jailing them.
    8th Apr 2020

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