RBA: Govt Policy Saved 4,600 Business Failures in 2019-20, Another 6,600 in 2020-21

• Published on
• 09 Oct 2020, 03:41 PM

By Sophia Rodrigues

The Australian government’s support policies to businesses affected by the Coronavirus pandemic saved 4,600 businesses from failing in 2019-20 and an additional 6,600 is expected to be saved in the 2020-21 year.

This compares with 1,400 business failures that would have occurred in the absence of policy support last year, and another 5,200 failures that could be expected this year.

LESS FAILURES DESPITE PANDEMIC

An analysis in the Reserve Bank of Australia’s twice-yearly Financial Stability Review publication shows that 13,000 business failures occurred in 2019-20, smaller than 15,000 to 20,000 annual failures that have occurred in recent years.

The analysis has considered three scenarios. The first one is where the pandemic shock has resulted in a 3% decline in business revenue in 2019-20 and further 9.5% decline in 2020-21 but there is no policy intervention.

A second scenario is the same as the first but with policy intervention. The third scenario is “normal times” based on 2017-18 balance sheets.

Based on the first scenario, the RBA estimates 1,400 businesses would have failed in 2019-20 relative to normal times. If there is no recovery in revenue in 2020-21, an additional 5,200 firms would fail, the RBA’s model shows. It is important to note that this estimate is based on the direct effect of the COVID-19 downturn through cash flow, and doesn’t take into account indirect effects such as an increase in leverage caused by decline in business cash buffers.

POLICY SUPPORT MORE THAN OFFSET PANDEMIC IMPACT

The second scenario is a real one as it considers policy support that businesses received from the government, mainly through JobKeeper payroll subsidy and the Cash Flow Boost for Employers, which significantly increased their cashflow.

This increase in cashflow boosted business cashflow relative to total assets by 25-35 percentage points and reduced failures by around 4,600, the RBA estimates. Thus, it more than offset the impact of the COVID-19 shock.

If JobKeeper and other policy stimulus are tapered in line with current announcements, a further 6,600 firms are estimated to be saved in 2020-21, the model shows.

The analysis is based on historical relationships between business balance sheets and failures over the period 2002-03 to 2015-16 where the Australian economy has been relatively stable.

If the failure rate from the 1990s recession was applied to the business population today, 7,000 more businesses would be expected to fail compared to more normal times or about 25,000 in total. Once again, this does not consider the relative magnitude of the stimulus during this pandemic and in the 1990s recession.

--Contact: Sophia@centralbankintel.com