Give people and businesses money now that they can pay back later (if and when they can)


The novel coronavirus sees Australia facing unprecedented major health and economic crises. The key to preventing a downward spiral in the economy is to avoid a collapse in the incomes of newly laid off workers who will not be able to afford what they normally buy, and to temporarily close businesses that will not be able to pay rent or other fixed costs, nor buy goods and services to be exchanged.

It is likely that once a vaccine is delivered by science, or even before, the economic recovery will begin. Hence the question: what are the fairest ways to manage this major trauma of short duration?

There is an instrument that should be used to increase the scale and effectiveness of the necessary fiscal stimulus. Income-contingent loans provide additional financial support without threatening future fiscal solvency.

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What is an income-contingent loan?

Most Australians are familiar with our HECS (Higher Education Contribution Scheme) for higher education fees. Students take out a loan from the government to cover the cost of their college now and pay it back when they earn more than a certain threshold in the future.

In what was a world first, Australia implemented this type of loan system in 1989 and it has now been copied in a dozen other countries.

For those with HECS debt, when income is low at certain times, such as unemployment, childcare, or caring for elderly parents, no repayment is required at that time.

The government recovers the money later when the debtor’s financial situation has improved. This is called an “income contingent loan”.

Higher education fees are lent on the basis that the debtor does not have to repay until he can afford it.
Dean Lewins/AAP

How could we use these loans for the COVID crisis?

It is useful to distinguish three categories of financial stress that have emerged that an income-contingent loan could help with:

1) for employees recently or soon to be made redundant

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

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

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

1. Now unemployed employees

For employees who are now unemployed, a HECS-like system could take the form of a fixed payment by the government (eg $5,000) per person. Part of this payment should be refunded according to existing (or new) HECS parameters.

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 effective HECS collection, including lessons learned, has shown us that all of this would be administratively simple.

Read more: Which jobs are most at risk from the coronavirus shutdown?

2. Small businesses affected

In the case of an income-contingent loan for businesses, a different approach should be used, which does not involve personal income. What is needed instead is an income-contingent loan – a system devised and promoted by Linda Botterill and Bruce Chapman nearly 20 years ago.

Business income reporting is a quarterly statutory requirement for businesses through the existing business activity report which is used to collect GST. Unlike profits, revenues cannot legally be manipulated based on the timing of repayments. The income-contingent loan requirement would be tied to the Australian Business Number.

In the case of a small business, the government could provide a loan, which would be capped at a level reflecting the business’ ability to repay when revenues recover. It can be a fixed amount (for example 25%) of the average annual income of the last three years.

Australian Academy of Social Sciences.

In order to minimize the risks of non-repayment, eligibility could be limited to companies that have a good chance of future solvency, as evidenced, for example, by the fact that they have been in existence for a specified number of years (e.g. three years).

The government should set a reimbursement rate, and past modeling has shown that small rates of, say, 5% to 8% of future annual earnings would be sufficient.

To ensure that all of this would be fair for businesses and sound for future budgets, the government would now have to model different loan amounts and different collection and interest rates.

Modeling of different budget planning assumptions would be needed to be more specific on policy details.

Read more: The real economic victims of the coronavirus are those we do not see

3. Large companies

In the case of aid to less small businesses, the sums of money necessary for the current situation require the intervention of the banks in collaboration with the State.

The government is not equipped to support large-scale commercial borrowing. But an income-contingent loan would still have an important role to play in such a partnership with commercial banks for today’s not-so-low financial borrowing needs.

The joint lending arrangement between the bank and the government would be for the government to provide a revenue-contingent loan that is a proportion of the bank loan. The government loan could repay the bank loan at very short notice until the business reopens and recovers.

A partnership of this type would be ideal for companies, which then have the ability to repay the normal loan even when there is no short-term income.

This would also be beneficial for banks, which would then have a much higher prospect of full loan recovery. It also provides a future taxpayer return for government support for banks in these difficult economic times.

Income-contingent lending to individuals and income-contingent lending to businesses would have major potential to support the Australian economy during a sharp temporary downturn, without putting additional pressure on future fiscal solvency. It is a bridge to a sustainable recovery.

The authors are Fellows of the Australian Academy of Social Sciences. However, these opinions are their own and are not representative of the Academy.


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