JobKeeper spared Aussies from poverty but what happens when it ends?

With unemployment increasing by 32.3% over the past year, you wouldn't be alone in assuming poverty may have increased with it. But, in a positive twist of fate, COVID-19 has in fact helped to alleviate income inequality in Australia - at least over the short term.

It may sound counterintuitive, but the Grattan Institute's household finances program director Brendan Coates says the "coronavirus crash" has spared 2.2 million Australians from poverty.

"It's likely that if you surveyed Australians now, income inequality would be lower than it has been for quite some time," he says.

"With JobKeeper and JobSeeker highly targeted at low-income earners, poverty has fallen through the floor during the crisis."

Similarly, Australian National University researchers from the Centre for Social Research and Methods found the government's support payments had reduced poverty and housing stress levels to those seen prior to COVID-19.

Without JobKeeper and JobSeeker, the researchers predicted the number of people living in poverty in Australia would have exploded from 1.6 million to 3.8 million, while the average poverty gap for households would have almost tripled from $593 per year to $1685.

Instead, Australia's poverty gap and the number of people living in poverty drastically dropped below pre-COVID levels, by 39% and 32% respectively.

Those on Newstart or Youth Allowance are estimated to have experienced the greatest benefit, with the poverty rate cascading from around 67% to just under 7%.

Despite these reductions, the ANU researchers estimated that the number of people living in poverty would increase by 740,000 in September, while 212,000 people would be added to poverty compared to pre-COVID economic and policy conditions.

The government's policy change in July, which would see JobKeeper and JobSeeker lowered from September onwards, pushed a large number of people back into poverty and increased the poverty gap and measures of housing stress, they argue.

Coates agrees, maintaining a reduction in income support payments will likely see the rate of poverty rise once again.

"The supplement was $550 a fortnight when it was introduced, then in July the government said it would reduce the rate to $250 a fortnight from October to the end of the year, now they're going to reduce it to $150 a fortnight; so, the rate of poverty is going to go back up," he says.

"So, while the short-term impact of COVID-19 will see inequality go down, the long-term impact could well see it go up once all the support washes out of the system."

ANZ's chief economist Richard Yetsenga recently wrote that inequality could be our biggest policy challenge in a post-COVID world.

"Stronger growth doesn't necessarily do much to reduce inequality beyond creating some jobs, but inequality can actually threaten the foundation of growth," he says.

"Those on higher incomes almost universally save more but those on lower incomes tend to borrow more. Inequality, in other words, tends to exacerbate financial vulnerabilities."

And while striving for better GDP growth will appeal to some as the best method to address this challenge, Yetsenga argues this approach will likely face its own trials and tribulations.

"Given those on lower incomes tend to spend more, where the growth ends up also matters for, well, the growth," he says.

"Less-standard policies require consideration, including those focused on reducing the structural sources of high inequality."

Coates believes it's going to take a long, hard look in the mirror to create long-lasting change.

"What COVID has shown us is that we can materially change inequality with policy - now

we have to choose if we want to keep doing that or not," he says.

"These are all value choices; if you wanted to keep the COVID supplement at $250 a fortnight, which is where it is right now, that would cost the government around $7 billion a year. That is 0.3-0.4% of GDP, so it would be boosting total government spending by around 1.5%."

It's not nothing, but it's not insurmountable, Coates says.

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