Too Much of a Good Thing? Australian Cash Transfer Replacement Rates During the Pandemic

• Published date: 01 March 2023
• Author: Robert Breunig,Tristram Sainsbury
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/1467-8462.12501

The Australian Economic Review, vol. 56, no. 1, pp. 70–90 DOI: 10.1111/1467-8462.12501

Too Much of a Good Thing? Australian Cash Transfer

Replacement Rates During the Pandemic

Robert Breunig and Tristram Sainsbury*

Abstract

During the early stages of the COVID‐19

pandemic in 2020 the Australian federal

government temporarily expanded the level

of cash relief available to the working‐age

population through supplemental benefit pay-

ments, a wage subsidy and allowing lump sum

withdrawals from private pensions. Here we

examine the scope and direct distributional

consequences of these measures. Two in five

working‐age Australians received at least one

of these three forms of transfer over a

12‐month window. The median recipient had

close to half their pre‐COVID‐19 income

‘replaced’by transfers. The programs inter-

acted to create a two‐tier welfare safety net

that put in place a poverty‐alleviating income

floor for workers in low‐earning occupations

and those on unemployment benefits, and

provided job certainty and greater direct

income support to those with higher incomes.

Aggregate weekly incomes were higher during

the initial period of COVID‐19 than they were

pre‐COVID‐19. Descriptive exercises, such as

this, do not provide information about the

‘impact’of pandemic policies and are limited

to what they directly measure. That noted, we

raise an important question for decision‐

makers facing future shocks: at what point is

there ‘too much of a good thing’with crisis

cash transfers?

1. Introduction

During the early stages of the COVID‐19

pandemic in 2020 the Australian federal

government temporarily expanded the level

and types of fiscal relief available to the

working‐age population. Three of the largest

measures were cash transfers targeted at

individuals: an $88 billion wage subsidy;

early access to $38 billion in withdrawals

from private pension accounts; and $52 billion

in (supplemented) working‐age benefit pay-

ments to the unemployed, students and

parents.

1

We use the term ‘transfer’here as

a generic label for all three programs even

though the pension account program allowed

individuals to access money from their own

superannuation accounts—see below. These

emergency cash transfers were in place for a

year, designed to alleviate hardship at a point

of acute stress, and would replace a portion of

the pre‐pandemic earnings of healthy indivi-

duals who found their income‐earning capa-

city suddenly and unexpectedly constrained.

In this article, we combine administrative

data on weekly Australian wage earnings with

the universe of administrative records to

examine the scope and some distributional

* Breunig: The Tax and Transfer Policy Institute,

Australian National University; Sainsbury: The Tax and

Transfer Policy Institute, Australian National University

and Harris School of Public Policy, University of

Chicago. Corresponding author: Sainsbury, email:

<tsainsbury@uchicago.edu>and <tristram.sainsbury@

anu.edu.au>

We thank Steven Hamilton and Jeff Borland for helpful

comments. Any errors or omissions are those of the

authors. Tristram Sainsbury acknowledges the support of

the Sir Roland Wilson foundation in funding his PhD

research.

© 2023 The Authors. The Australian Economic Review publishedby John Wiley & Sons Australia, Ltd on behalf of The University of

Melbourne, MelbourneInstitute: Applied Economic & Social Research, Faculty of Businessand Economics.

This is an open access article underthe terms of the Creative Commons Attribution License, which permits use, distributionand

reproduction in any medium,provided the original work is properly cited.

dimensions to the three emergency COVID‐19

cash transfers over the 12 months between

28 March 2020 and 28 March 2021. In doing so

we provide five stylised facts around the nature

of income redistribution during the early part of

COVID‐19.

First, the scale of fiscal intervention was

extensive. In total 6.5 million working‐age

Australians (42 per cent of the working‐age

population) accessed the three programs over

the 12‐month period. We find that transfers

represented 20 per cent of aggregate wages

over this time.

Second, the level of transfer per recipient

was substantial. We find that the median

recipient had 46 per cent of their weekly pre‐

COVID‐19 wages replaced by the transfers.

The average was 42 per cent of pre‐COVID‐

19 wages.

Third, there was significant heterogen eity in

program receipt. In effect, a two‐tier welfare

system was created. Tier one centred around

the fortnightly supplements to benefits pay-

ments. The supplement rate was initially set at

$550 a fortnight, doubling the maximum basic

rate of unemployment payment. Supplements

were disproportionately accessed by workers i n

low‐wage occupations and welfarerecipients in

the bottom quint iles of the earnings d istribu-

tion. These supplements can be characterised

as putting in place a poverty‐alleviating

income floor.

Tier two centred around the access to an

$10,000 lump sum pension withdrawal and

the $750 per week JobKeeper wage subsidy.

The latter served the twin purposes of

providing employment certainty and guaran-

teeing payments to workers at least at the

minimum wage. These two programs were

accessed disproportionately by the middle and

upper‐middle segments of the income dis-

tribution, by males, and by workers in

managerial, technician and trades occupations.

Fourth, taken together, the programs re-

sulted in strong, if short‐lived, shifts in the

income distribution. The mass of population at

the bottom of the income distribution fell,

with the number below the $450 weekly

Henderson poverty line falling by approxi-

mately 1.8 million individuals during the most

acute six‐month phase of the pandemic. They

increased the population mass in two regions:

among lower‐middle incomes of $500–800

per week, and upper‐middle incomes of

$1,300–$2,300 per week.

And fifth, a combination of resilience in

wage‐earning (among transfer recipients and

non‐recipients) and the COVID‐19 transfers

served to increase total gross income flows

among the adult Australian population in

2020.

2

This is unusual among adverse macro-

economic shocks. It is standard to anticipate a

drop in aggregate income flows in the

immediate aftermath of a shock. The broadly

accepted role of counter‐cyclical economic

policy is to ‘fill the income hole’and partly

ameliorate that income loss, and in so doing

smooth consumption. Instead, the transfers

(and other fiscal and monetary actions) were

so large and comprehensive that they con-

verted a counter‐cyclical crisis response into a

pro‐cyclical income stimulus.

The transfers existed, in principle, to allow

Australia to pursue a highly restrictive

‘COVID‐zero’approach until the nation was

sufficiently vaccinated and could pivot to a

longer‐term ‘living with COVID’approach. It

should not be forgotten that Australia avoided

potentially calamitous outcomes due, in part,

to the scale and speed of the policy response

(Kennedy 2022) and due, in part, to a more

mild experience of COVID‐19 than was

initially feared. Decision‐makers had to con-

tend with acute uncertainty alongside the

sense of urgency. It was not known at the

outset how long emergency measures would

be needed, in what form and if the ‘vaccina-

tion strategy’would prove successful.

Our analysis serves to expose important

macroeconomic trade‐offs that were implicit

in Australia's pandemic fiscal strategy. At an

aggregate level, transfers worth 9 per cent of

annual GDP proved impossible to sustain over

even the initial two‐year phase of COVID‐19.

The measures instead lasted for six months in

a generous form and six months in a reduced

form before ceasing. We highlight how the

income stimulus coincided with stronger

consumption outcomes, an unprecedented

labour market recovery and a rapid increase

71Breunig and Sainsbury: Australian Cash Transfer Replacement Rates

© 2023 The Authors. The Australian Economic Review published by JohnWiley & Sons Australia, Ltd on behalf of The

University of Melbourne, Melbourne Institute:Applied Economic & Social Research, Facultyof Business and Economics.