'The alternative is to let the economy to crash and burn': Economist suggests zero-interest long-term loans for everyone

LIke the Higher Education Contribution Scheme, in which students can borrow for university fees, the loans would not have to be paid back till someone's income reached a threshold - which is currently $46,000 for HECS.

For some low-income earners that would mean they never had to repay the loan, Professor McKibbin said. For others, the repayments would be made by way of a higher tax rate over 20 or 30 years, once they reached the threshold income.

Everyone including casual workers would have access to a minimum amount, paid monthly.

For businesses, the monthly loan amount would be based on cash flow for the past five years (or fewer for new businesses) - and the repayments would start once their cash-flow recovered to pre-coronavirus levels.

The key was to keep money flowing in the economy, keep incomes stable and ensure people could pay their mortgage and their bills, to counter the "self-destructive "closed circle" where people weren't being paid so they weren't spending so businesses couldn't pay their workers.

"The alternative is to let the economy to completely crash and burn," Professor McKibbin said.

The government will announce its second tranche of bailout and stimulus measures on the weekend, including a simplified welfare system for what could amount of hundreds of thousands of people who lose their jobs in the coming months. Banks are reported to be preparing an announcement on their response as early as today.

Asked on Sydney radio about a HECS-style scheme on Friday, Prime Minister Scott Morrison said, "What we're working on with the banks, I'm very confident we are going to be able to get a situation where we're achieving the same objective."

Professor McKibbin, from the Australian National University's Crawford School of Public Policy, has modelled the impacts of pandemics, including SARS and the 2006 flu outbreak, and now coronavirus.

His analysis shows that a low-end pandemic which infects 10 per cent of the population could wipe $US27 billion from Australia's GDP, and a worst-case pandemic, infecting 30 per cent would cost the Australian economy $US103 billion.

Professor McKibbin fast tracked his analysis in February to help Treasury and the Reserve Bank in their modelling and preparations, and after being asked for advice by world financial institutions including the International Monetary Fund, the World Bank and the European Central Bank.

The message is dire. Even under the low-end pandemic, the unemployment rates shoots up in the first year by about 2 percentage points to 7 per cent. In the worst-case, the world economy contracts by 8 points, pushing Australia's unemployment rate over 10 per cent, double what it is now.

But Professor McKibbin said the actual impact would depend on the success of the government and central bank interventions.

"Nothing in our study is a forecast," he said. "Policy responses can totally change the outcome."

The Reserve Bank's move on Thursday to push interest rates to an effective zero and provide a $90 billion fund that banks can access at fixed interest rate to lend to business was designed to ensure the financial system didn't freeze and to prevent panic.

It should work to keep people calm, but was unlikely to solve the short-term economic shock, because providing credit to businesses only worked if businesses wanted it. Likewise, the government's announcement last week of a $22.9 billion stimulus package focussed on incentives for businesses to buy equipment and keep employing staff required firms to be in business and willing to spend on new equipment.

"They're filling up a swimming pool and if you want to jump in you can but it doesn't mean we're going to jump in," Professor McKibbin said.

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Other measures were also needed, including transparency to prevent panic.

"One of the indicators that's really important is the quality of government and the trust in government. If you don't trust your government then you're going to panic," he said.

"The main thing is to manage people's expectations, give them full information, know what you're doing, have a plan and be willing to take steps where necessary to truncate the virus if possible, so the information flow is critical to any policy response."

A recession was highly likely in any case. But Australia was in a much better position than any other country, economically and in health terms. On health, pandemic behavior was influenced by the density population, the quality of health care and geographic proximity to other countries - and by all measures Australia scored well.

On the economy, Australia had a healthy budget and low debt and could afford much-bigger debt for a HECS-style loan scheme.

"Luckily a lot of people who argued to make government ever bigger weren't listened to," Professor McKibbin said. "This is why government should be an insurance policy not a nest egg you can live off."

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