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July economic and fiscal update and what it means for the middle market
Technical article

July economic and fiscal update and what it means for the middle market

Today, the Federal Government released its July Economic and Fiscal Update (JEFU) statement, painting a picture that Australia is performing better than many of its OECD equivalent economies.

However, the reality is that COVID-19 has had, and will continue to have, a major impact on the domestic economy, unemployment, debt and GDP into the future. To put this in context, the GFC resulted in an estimated 1.7% reduction in global GDP for the 2008-09 financial year. In comparison, the global economy is estimated to decline by approximately 4% this year due to the effects of COVID-19.

In Australia, real GDP experienced its sharpest fall on record in the June quarter, reducing by approximately 7%. In 2020, the Australian economy is expected to endure its largest annual fall in economic activity on official record, being approximately 3.75%. This compares favourably to the United States and the United Kingdom that are estimating contractions of 8% and 10% respectively.

The Government is estimating that Australian GDP will rise to 2.5% in 2021, with many of the estimates put forward in the JEFU outlining improvements to GDP and unemployment into the 2020-21 financial year. However, with the daily rates of COVID-19 infections at the highest level ever (currently around 1.6 million infections worldwide over the last week) and the uncertainty that this poses for many industries in Australia and globally, it is difficult for the Government to forecast these positions with any degree of certainty.

With increasing levels of government debt and uncertainty with respect to global economies, it is critical that Government measures continue to be targeted to help support those businesses that will need it the most. It is also important for businesses and individuals in the middle market to plan for COVID-19 over the long term and to ensure that they are making the right strategic choices during this time of uncertainty.

Fiscal spending

The overall cost of support by the Government is budgeted to be around $289 billion in fiscal and balance sheet measures, which is equivalent to around 14.6% of GDP. This will (in turn) result in estimated deficits of $85.8 billion in 2019-20 and $184.5 billion in 2020-21. The global economy is forecast to contract by 4.75% in 2020. This is significantly higher than that experienced during the GFC and is the single most significant contraction to the global economy that occurred since the Great Depression in the 1930s. However, the Government has estimated that the stimulus spending has resulted in additional GDP growth of 0.75% in 2020 and is estimated to provide growth of 4.25% in 2021. The significant stimulus spending has been effective in reducing the overall impact of COVID-19 on the Australian economy.

Unemployment rates

In April 2020, the unemployment rate rose to 6.37% and increased to 7.45% by June 2020. Prior to COVID-19, the unemployment rate was at a historical low of 5.09% as at the end of February 2020. However, these numbers do not include employees that are currently working zero hours (i.e. under JobKeeper) or those that are underemployed. The underemployment rates for April and June respectively were 13.77% and 11.68%, with the effective unemployment rates closer to 15% and 11% for both April and June respectively. These numbers show the real impact that JobKeeper has in terms of reducing the unemployment rates in the short term.

The Government has continued to forecast the measured unemployment rate rising as more people are pushed into the labour market, with an estimation that the unemployment rate will peak at around 9.25% in the December quarter, before returning to around 8.75% in 2020-21. Accordingly, the forecasts outline the significant impact that COVID-19 will have on the economy over the longer term.

Net debt

Prior to COVID-19, net debt was estimated to be 19.5% of GDP in 2019-20, falling as a share of GDP to 16.0% by 2022-23. With funding of the stimulus measures, net debt is expected to be $488.2 billion (24.6% of GDP) at 30 June 2020 and increase to $677.1 billion (35.7% of GDP) at 30 June 2021. While these amounts appear high, the percentages are relatively low comparatively to other OECD counties. For example, these ratios are currently approximately 80% and 110% for the United Kingdom and the United States respectively.

With the current weighted average yield for future issuances of Treasury Bonds being around 0.8%, the additional debt from stimulus measures will likely result in a comparatively low servicing cost for these measures. Furthermore, since the onset of COVID-19, each of the three major ratings agencies have affirmed Australia’s AAA credit rating.

Accordingly, the low cost of financing in the current climate provides an opportunity to fund these stimulus measures with little cost at the moment to the economy. The alternative would have been to reduce government funding, which could have resulted in significantly higher unemployment rates and significant impacts to the economy that may have been more difficult to recover from.

How do we compare globally?

There are more than 6 million active COVID-19 cases globally with cases of infection increasing to 1.6 million over the last week, being three times that in April 2020. Comparatively speaking, Australia has performed well in containing the outbreak of the virus, even taking into account what is happening in Victoria. Australia currently has approximately 156 cases per 1 million people, which compares favourably to the United Kingdom and the United States which have around 3700 and 7700 per 1 million people respectively. This has helped to reduce the overall impact of COVID-19 on our economy compared to other OECD countries.

Outside of Victoria, COVID-19 restrictions have been eased in accordance with the three-step plan outlined by the Prime Minister on 8 May 2020. These restrictions will see the majority of the country moving to a 100-person limit to indoor activities by the end of September, with that requirement being removed by the end of 2020. The four square metres per person rule is intended to apply post 31 December 2020. These are key assumptions that are built into the JEFU and underpin many of the estimates of economic performance.

However, the recent outbreak in Victoria has resulted in further lockdowns for a six-week period. We expect this to have a significant impact to the Victorian economy and will delay its recovery. Essentially, this may result in a two-tiered economy, with certain states moving at a much slower pace. The same impact may occur in other states should a second wave occur.

Targeted stimulus

One of the most successful stimulus measures has been the JobKeeper regime, with 960,000 organisations and over 3.5 million individuals currently covered by the regime. As at 16 July 2020, payments totalled $30.6 billion over the six JobKeeper Payment fortnights to 21 June 2020. This week, the Federal Government announced changes to the regime, which extends the stimulus measures for another 13-fortnights, with reduced payment amounts and more stringent eligibility tests. To be eligible, a business will need to demonstrate a cumulative decline in turnover of 30% (or 50% for large business) for each quarter since 1 April 2020. Click here for more information.

While this may be a suitable test for some states that are easing their way out of restrictions, this may not be an appropriately targeted measure in Victoria (or any other state that suffers a second wave). This is because the full effects of COVID-19 may not be seen until the September 2020 quarter.

To continue to ensure that the economic impact of COVID-19 is minimised, we believe that it is essential for the Government to appropriately target the JobKeeper regime to take into account these potential effects. For example, we believe that the cumulative quarter test could be replaced with an average monthly test, coupled with testing the last previous quarter (to more appropriately target those businesses that are still being impacted by COVID-19 at the end of September). We believe these types of slight modifications could better ensure businesses are eligible for the JobKeeper regime where they continue to be significantly impacted by COVID-19.

What does this mean for the middle market?

It is important for business and individuals in the middle market to ensure they have appropriately considered the impact of COVID-19, taking into account the expected effects going forward.

  • Stimulus measures continue to be available to many businesses. It’s important to explore and utilise the support/buffer provided to develop a longer-term plan to manage through – the stimulus measures will not go on forever. See Appendix A for an outline of some of the measures currently available.
  • Economic conditions will continue to be challenging for the next several years. Assess the impact of lower activity on your specific market and circumstances and plan a response to the extent needed. For those disrupted, diversification of revenue, cost control and certainty of funding are the first considerations.
  • Most businesses are still operating, many in a disrupted way. This “COVID-19 normal” is likely to exist for some time, and if you have not yet addressed the sustainability of current practices and how to improve on circumstances, the time is now. Technology adoption, supply chain, client/customer relationships, and team culture, development and engagement are central to building a resilient business.
  • Plan, project and re forecast. Monitor the horizon, your businesses performance and likely future position. Managing all aspects of asset risk, funding certainty and return (cash and earnings) are critical to avoid future disasters.
  • The old adage that opportunity lies in every crisis may provide the perspective needed to respond to the challenges presented. Seek opportunities to improve the business by way of innovation, search for growth by all means, and undertake an honest assessment of existing products, services and markets.

Appendix A – stimulus measures

JobKeeper payment

The JobKeeper payment provides a subsidy of $1,500 per fortnight for each employee of eligible businesses. While originally slated for completion in September, the Federal Government has announced it will now continue until 28 March 2021 with new eligibility and payment conditions. Businesses that satisfy the extended eligibility criteria will be entitled to a payment of up to $1,200 for the period 28 September 2020 to 3 January 2021 and $1,000 for the period 4 January 2021 to 28 March 2021 per eligible employee or business participant. Lower rates will apply for employees or business participants that work reduced hours. Further information is available here.

Boosting cash flow for employers

The Government’s ‘cash flow boost’ provides eligible employers with a credit of between $20,000 to $100,000 depending on the amount of their PAYG withholding during the relevant period. Eligible businesses will have already received the first payment upon lodgement of their activity statements from March 2020, with the second payment (equal to the first) payable in two or four instalments across activity statements from June to September 2020.

Income support for individuals

From 27 April 2020, recipients of JobSeeker and certain other government payments have been eligible for a coronavirus supplement payment of $550 per fortnight. From 25 September 2020 this payment will be reduced to $250 and will continue until 31 December 2020. Recipients will be able to earn up to $300 per fortnight before the supplement is reduced.

Payments to support households

The Government announced in March that it would provide two separate payments of $750 to support eligible pensioners, income support recipients, carers and student payment recipients. The first of these payments was made from 31 March 2020, with the second payment commencing from 13 July 2020.

Backing business investment

Businesses with an aggregated turnover of less than $500 million can immediately deduct an additional 50% of the cost of assets purchased between 12 March 2020 and 30 June 2021 (regardless of cost).

Supporting apprentices and trainees

The Supporting Apprentices and Trainees wage subsidy reimburses eligible businesses up to 50% of an apprentice or trainee’s wages, up to $7,000 per eligible apprentice per quarter. The subsidy applied only to small businesses (up to 20 employees) until 30 June 2020. From 1 July 2020 this was expanded to include medium businesses (up to 200 employees) and is available until 31 March 2021.

Temporary early access to superannuation

In March, the Government announced that it would allow individuals affected by COVID-19 to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21. The date to apply for the second withdrawal has been extended to 31 December 2020.

Increasing and extending the instant asset write-off

Businesses with an aggregated turnover of less than $500 million can immediately deduct the cost of an asset (for assets costing less than $150,000) until 31 December 2021 (if first used or installed for use between 12 March 2020 and 31 December 2021).


The Government’s HomeBuilder program provides eligible owner-occupiers (including first home buyers) with a grant of $25,000 to build a new home or substantially renovate an existing home where the contract is signed between 4 June 2020 and 31 December 2020. Eligibility requirements are set out in a Treasury Fact sheet (available here).


As part of its JobTrainer Skills Package, the Government announced that a $1 billion JobTrainer Fund would be jointly established with states and territories. The aim of the fund is to provide up to an additional 340,700 training places to help school leavers and job seekers access short courses to develop new skills in growth sectors and create a pathway to more qualifications. Courses will be free or low cost in areas of identified need, with the Government providing $500 million with matched contributions from state and territory governments.

Child care

On 13 July 2020, the Government announced that the Child Care Subsidy (CCS) arrangements would be re-established and that JobKeeper support would cease from 20 July 2020 for employees of a CCS approved service and for sole traders operating a childcare service. Families will continue to be supported through this transition by easing the CCS activity test requirements and ensuring childcare fees remain at their pre‑COVID‑19 levels. From 13 July 2020 until 31 December 2020, services open and located in an area of Stage 3 or higher ‘stay at home’ restrictions in Victoria are permitted to waive families’ out of pocket fees where a child is not attending due to COVID-19, and an absence is recorded.


In June 2020, the Government announced a $250 million JobMaker package to support production and employment in the arts and entertainment sectors. Further information is available here in a press release by the Minister for Communications, Cyber Safety and the Arts.

On 17 July 2020, the Government announced an additional $400 million for the Location Incentive to attract large budget international film and television productions to Australia over the next seven years.


To support the aviation sector, the Government will provide $1.9 billion over four years from 2019‑20. This includes the Australian Airline Financial Relief Package, which provides support for the sector through rebates and fee waivers for aviation fuel excise, airservices charges on commercial aircraft operators and domestic and regional aviation security charges. This is in addition to $428 million provided to the aviation sector under the COVID‑19 Relief and Recovery Fund, which includes the Regional Airline Network Support program that ensures regional communities continue to receive essential air services.

Relief and recovery fund

The Government established a $1 billion COVID‑19 Relief and Recovery Fund to provide direct support to the regions and communities most affected by the economic impacts of the pandemic, supporting a range of industries including the aviation, agriculture, fisheries, tourism, and arts sectors. Further information is available in a Treasury Fact Sheet available here.

For more information about the July economic statement or to discuss the impact of COVID-19 on you or your business, contact a Pitcher Partners representative.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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