Economic gains and losses over the COVID-19 pandemic

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Released
7/09/2022
Source
Australian National Accounts: National Income, Expenditure and Product, June 2022

COVID-19 caused significant disruption to historic patterns of growth in the Australian economy. With most COVID-19 related restrictions and health measures lifted, economic growth has begun to return to longer term patterns.

This article looks at the components of the Australian economy most impacted by the pandemic and discusses the cumulative gains or losses in comparison to their pre-pandemic trajectory. Projections of key economic aggregates were calculated based on average quarterly growth for the 10 years prior to the pandemic (March 2010 to December 2019). These projections were compared to actual estimates from March quarter 2020 to assess the magnitude of potential gains or losses.

Australian Gross domestic product (GDP) was greatly affected by the L-strain and the Delta outbreaks of COVID-19, resulting in two large falls in GDP during the height of restrictions across Australia. Strong rebounds in growth followed as the population emerged from lockdowns. While growth is returning closer to pre-pandemic rates, the level of GDP is estimated to have suffered a cumulative loss of $158 billion compared to its pre-pandemic trajectory.

This $158 billion loss was calculated using the average of the 3 GDP measures (Expenditure, Production and Income) as published in the Australian national accounts. Further analysis below looks at the components of the GDP Expenditure and Income measures, to show how the cumulative losses (and gains) differ across the economy. Household income accounts and resultant net savings are also analysed to explore the direct economic impact of the pandemic on households.

GDP Expenditure

Household consumption

Record falls in household consumption were the main driver of the cumulative loss to GDP. The declaration of the pandemic caused a swift change in demand and consumption behaviour. The nationwide COVID-19 lockdown in March 2020 resulted in a decline in spending on travel services, and restaurants and recreation as they were no longer accessible. As consumers spent more time at home, household consumption shifted to goods such as food, furnishings and alcohol, with increases in the use of online platforms for their purchases. The gradual reopening of the economy and international borders saw household consumption recover as supply and demand for discretionary services resumed. Despite this, since the pandemic began, households have spent $148 billion less than a continuation of their pre-pandemic spending trajectory would have implied.

Private investment

Private investment declined in the first year of the pandemic as operating restrictions and heightened uncertainty reduced firms’ appetite for new investment. Private investment rebounded by 2021 as improved business conditions, combined with government tax incentives, drove increased investment in machinery and equipment. Dwelling investment also rose with low interest rates and support from the federal government’s HomeBuilder scheme.

Private investment has recovered from the initial shock of the pandemic, with an accumulated gain of $9 billion above a continuation of the pre-pandemic trajectory. Although it remains above its pre-pandemic trajectory, private investment has fallen in recent quarters due to material and labour shortages impacting construction.

Government consumption

Government consumption partly offset the cumulative losses to GDP, driven by public health spending as Commonwealth and state governments managed the impacts of COVID-19 across the economy. The early stages of the pandemic saw increased spending on measures to contain the spread of COVID-19 such as contact tracing, personal protective equipment (PPE), quarantine facilities, and pop-up testing sites. The subsequent Delta and Omicron variant outbreaks accelerated public health spending with intensive vaccine rollout programs, high levels of PCR testing, and distribution of rapid antigen tests as COVID-19 cases in Australia peaked in early 2022. This resulted in an additional government spend of $42 billion over the course of the pandemic relative to its pre-pandemic trajectory. It should be noted that government subsidies such as JobKeeper do not contribute to government consumption and are instead captured in the GDP Income measures discussed below.

GDP Income

Taxes less subsidies on production and imports

Taxes less subsidies on production and imports recorded an estimated cumulative loss of $170 billion, driven by a $166 billion increase in subsidies paid and a $4 billion loss in tax revenue.

Subsidies paid reached record highs in 2020 with the introduction of the JobKeeper and Boosting cash flow for employers policies offering temporary support for businesses. With the conclusion of these programs, subsidies fell from these historic highs in 2021 but remained elevated compared to pre-pandemic levels. There were substantial total losses to government income from the subsidies, although they should be viewed against the gains in business and household income through operating surplus and compensation of employees, as discussed below.

Taxes on production declined during the initial stages of the pandemic, driven by operating restrictions during lockdowns and subsequent losses in employment and hours worked. This was reflected in GST, payroll, income and gambling taxes. A similar pattern was observed for the Delta strain, although the decline was more modest. With the reopening of the economy, government tax revenue has recovered, supported by labour market strength and strong underlying domestic demand.

Operating surplus

Gross operating surplus and mixed income (GOSMI) recorded an estimated cumulative gain of $185 billion during the pandemic, supported by government subsidies, strength in underlying demand and commodity prices. Early in the pandemic, non-mining industries drove the gains in GOSMI, as businesses were able to retain some of the government support payments as profits.

The recent strength in GOSMI was driven by the mining industry, as companies benefited from high commodity prices at a time of tight supply and strong global demand. This raised operating surplus well above its pre-pandemic trajectory.

Compensation of employees (COE)

The initial impacts of COVID-19 lockdowns drove a fall in COE as restrictions led to decreased demand, hours worked and significant job losses. Private COE drove the fall as businesses across industries were forced to close or reduce their operations. The government’s subsidy programs helped to prevent a greater fall in COE. Public COE partly offset the falls, due to strong demand for healthcare workers and other public service personnel for contact tracing and quarantine measures.

COE has shown continued growth with the reopening of the economy, along with strong demand and a tightening labour market. COE has been more resilient during subsequent strains of COVID-19, as businesses adapted to restrictions and working from home became more prevalent. High demand for skilled workers has contributed to growth in recent quarters, leading employers to offer additional non-wage compensation as an incentive to attract and retain staff. While recent COE is near its pre-pandemic trajectory, the losses suffered early in the pandemic are yet to be recovered, cumulating to an estimated loss of $47 billion.

Household income and saving

Gross disposable income

Gross disposable income for households recorded a cumulative gain of $75 billion relative to a continuation of its pre-pandemic trajectory, driven by gains in income receivable and reductions in income payable.

In addition to gross mixed income, the gain in income receivable was driven by social assistance benefits. Government support payments in response to COVID-19, such as the Economic Support Payment and Coronavirus Supplement were the main contributors to the $72 billion in added social benefits received.

Adding to the cumulative gains was lower income payable compared to the pre-pandemic trajectory. This was driven by lower interest payments as the RBA cut interest rates to record lows, as well as income tax relief provided to households.

Household net saving

The higher gross disposable income, combined with reduced household spending resulted in households accumulating an additional $225 billion in savings since the pandemic began. These savings buffers built during the pandemic are being drawn down as income and consumption return to pre-pandemic patterns and the cost of living increases.