$60b JobKeeper error caused by pandemic fears
John KehoeEconomics editor
May 25, 2020 – 12.00am
Treasurer Josh Frydenberg was in Melbourne last Thursday night and received a late phone call from Treasury deputy secretary Jenny Wilkinson in Canberra.
The Treasury fiscal group head had urgent news on the government's $130 billion JobKeeper wage subsidy that was rushed out eight weeks earlier in reaction to the coronavirus economic crisis.
About three million people had so far been enrolled by employers, less than half the 6.5 million employees the Australian Taxation Office had counted and which the government had stated publicly.
The discovery alerted Treasury that its March forecast of a potential six million enrolments was wrong and it needed to be significantly revised down.
Treasury now expects the $1500 fortnightly wage subsidies to be taken up by 3.5 million workers at a cost of $70 billion - almost half the original cost.
JobKeeper is still easily the most expensive stimulus measure in Australia's history and the government is so far resisting calls by Labor to use the unspent borrowed money on more casual workers.
Treasury overestimated the cost of JobKeeper largely because the medical advice upon which it was based and the assumed need for prolonged business shutdowns turned out to be massively pessimistic.
As one senior official observes, chief medical officer Brendan Murphy was "the only voice being listened to in March".
Treasury was wrong because the epidemiological theoretical models were wrong in projecting a potential 50,000 to 150,000 virus deaths and that daily demand for intensive care beds could hit 5000, 17,000 or 35,000, depending on social distancing restrictions.
The planned six month "hibernation" of the economy that Prime Minister Scott Morrison was preparing for, based on medical advice, was factored in to Treasury's forecast.
Now, after less than two months, businesses are resuming as states ease restrictions.
Far fewer companies than expected will suffer the required 30 per cent fall in monthly revenue to qualify their staff for JobKeeper.
Deloitte Access Economics budget expert Chris Richardson says the underspend is relatively good news at a challenging time for the economy.
"The Treasury change in numbers makes sense," he says. "We're saving more jobs than we thought."
"Good news on the virus is flowing through to better news on the economy, which is flowing through to better news on the budget."
Treasury happened to be tasked with making the JobKeeper forecasts - more like a blindfolded best guess - at the absolute peak of the panic.
In the week commencing March 23, when Treasury was hurriedly compiling its JobKeeper forecasts, new daily confirmed cases of coronavirus were rapidly rising at a three-day moving average of about 29 per cent.
(It turns out about 70 per cent of the cases were imported from returned overseas travellers, with minimal community transmission.)
Commentators were declaring Australia was two to three weeks behind Italy in becoming the next coronavirus catastrophe.
Hundreds of thousands of retail staff were laid off at retailers including Myer, Solomon Lew's Premier Investments, Accent Group, jewellery chains Michael Hill and Lovisa, women's retailers Mosaic Brands, City Chic and PAS Group, outdoor leisure retailer Kathmandu, homewares retailer Adairs and autoparts retailer Bapcor.
Some one million people rushed to pre-register their details on Centrelink's website. Scenes of thousands of jobless people queuing at Centrelink dominated news coverage.
Panic and hysteria were gripping our political leaders, particularly state premiers.
From March 24, the national cabinet advised people to stay at home except for essential activities. Governments halted elective surgery and shut registered and licensed clubs, hotels and pubs, beauty and massage parlours, entertainment venues, cinemas, casinos, nightclubs, indoor sports venues, including gyms, and places of worship.
Restaurants and cafes were allowed to serve only takeaway food and drinks. Public gatherings were soon limited to two people.
The states took other measures, such as closing borders, limiting intrastate travel, banning golf and fishing in Victoria, and closing schools.
Victorian Premier Daniel Andrews said the step was necessary or "our hospitals will be overwhelmed, and more Victorians will die".
NSW and Victoria even flirted with invoking harsher New Zealand-style stage four shutdowns of non-essential activities.
Remarkably, the government's official epidemiology data now shows that weeks before the harsh lockdowns were imposed, the effective reproduction rate (Reff) of the virus had been below one in each state since mid-March.
The reproduction number is crucial. It is the average number of people to whom an infected person passes on the virus. The public health goal is to get the Reff below one, so the infection will fade away.
Nevertheless, with the medical advice dominating policy decisions in Canberra, it's not surprising that in the week of panic Treasury overestimated the number of people who would be stood down from employment and businesses that would be eligible for a wage subsidy.
"This estimate was developed at a time when coronavirus cases were growing significantly in Australia and restrictions were being tightened across Australia and much of the world," Treasury says.
When Morrison and Frydenberg unveiled the $130 billion JobKeeper package on March 30, new daily coronavirus cases were beginning to fall sharply.
The three-day moving average of new daily cases fell from almost 30 per cent to below 10 per cent. It was soon falling into single-digit figures and the virus was under control by early April.
So far just over 100 people have died and daily intensive care unit demand peaked at below 100, not the best-case scenario of almost 5000.
The epidemiologists advising the government turned out to be too pessimistic. Perhaps more contrarian voices needed to be heard around the national cabinet table and inside Treasury when they were undertaking their economic policy planning.
Some private forecasters were more accurate.
Coolabah Capital portfolio manager and columnist for The Australian Financial Review, Christopher Joye, wrote on March 23 that his financial modelling based on real-time international virus data showed Australian infection numbers would peak in early April.
To be sure, Treasury's forecast was still a bad miss.
Experienced economic forecasters say it never really passed the simple "sniff test" that Treasury's model forecast that almost half the 13 million workforce would be paid government wage subsidies.
But these were unusual times. The annual federal budget is usually compiled over three to four months. The $130 billion wage subsidy was put together in less than two weeks.
Since his time as treasurer, Morrison, and Finance Minister Mathias Cormann have generally erred on the side of conservative budget forecasts. So Treasury likely also built in a bit of a buffer - it is generally better to underspend than overspend.
Treasury under Labor made the opposite forecasting mistakes after the global financial crisis - repeatedly underestimating the size of budget deficits. Now the economic downturn assumed by Treasury is less severe - though still undoubtedly bad - than the worst-case scenarios projected.
"The difference between Treasury's estimates at the time and the number of employees now accessing the JobKeeper program partly reflects the level and impact of health restrictions not having been as severe as expected and their imposition not having been maintained for as long as expected at the time," Treasury says.
"This has been reflected in some improvement to the outlook for the economy since the original estimate was developed as a consequence of these and other factors.
"The variation in estimates also reflects the inherent uncertainty associated with estimating the take‑up of a demand-driven program in the current circumstances."
It still expects unemployment to hit 10 per cent, but with less people requiring JobKeeper.
The Treasury forecasting error was discovered last week after the Australian Taxation Office realised it was paying the wage subsidies for about three million workers.
That jarred with the estimated 6.5 million employees that businesses had informally told the ATO would be eligible for the scheme in an online application form.
The ATO administrative error was caused by about 1000 out of more than 900,000 (0.11 per cent) enrolled businesses accidentally filling in the wrong number of employees in the online JobKeeper application forms.
ATO Second Commissioner Jeremy Hirschhorn says about 550 businesses with one employee mistakenly reported that they had 1500 eligible staff, confusing it with the $1500 fortnightly payment.
No extra money was paid out, because the $9 billion in payments so far can only go to employees with verified tax file numbers.
"I stress that that was an estimate which we collected for analytical purposes only," Hirschhorn says. "It made not one difference to the amount we have paid. We have made no underpayments or overpayments."
The ATO did not cause the Treasury forecasting error, which was made almost two months earlier.
In fact, the ATO's mistaken real-time tracking numbers, amounting to 6.5 million people, reinforced Treasury's (now mistaken) forecast of six million.
The scheme appeared to be oversubscribed and on track for a cost blowout.
Treasury officials told a Senate estimate hearing on Thursday morning 6.5 million people were enrolled.
By Thursday night, both errors were exposed on the number of people enrolled and the number of people forecast to join.
Now, about three million people are legitimately enrolled and Treasury expects this to rise to 3.5 million.
Frydenberg has refused to criticise the Treasury and ATO officials who provided him with the incorrect numbers.
Sources say Frydenberg has rung Treasury Secretary Steven Kennedy, Treasury fiscal group boss Wilkinson, ATO Commissioner Chris Jordan and Hirschhorn multiple times in recent days, telling them nobody was to blame and they would all move on together.
Frydenberg faces censure from Labor over the record-breaking $60 billion forecasting error. He is under pressure from shadow treasurer Jim Chalmers to deploy some of the unspent money on short-term casual workers who missed out on JobKeeper.
Whatever the outcome, politicians and media criticising the government over the JobKeeper forecasts should also scrutinise the health assumptions and medical advice relied on by Treasury.
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John Kehoe is Economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump's election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com
Josh Frydenberg