The government will slash the JobKeeper wage subsidy, with about 2.1 million workers expected to be thrown off the scheme at the end of September and another 400,000 from January.
People that remain on JobKeeper will lose at least $150 a week - and more for part-timers, after the government announced a two-tier JobKeeper payment from October.
At the same time, the government is cutting the unemployment benefit by $150 a week and will require people on the benefit to apply for four jobs a month and meet other tests to get the money.
"JobSeeker and JobKeeper are not do-nothing payments," Prime Minister Scott Morrison said.
"JobSeeker and JobKeeper are payments that support people's incomes but also do not and are not designed to prevent them from going out and seeking work to improve their circumstances."
Mr Morrison announced that the JobKeeper wage subsidy would be cut in October and again in January.
From October, the payment for people working 20 or more hours a week (as of February 2020) will be cut from $750 a week to $600 a week.
For people working fewer than 20 hours, the payment will be cut from $750 a week to $375 a week ($750 a fortnight).
The 20 hours' work applies to February 2020, before the virus hit, in a measure likely to complicate the system.
From January, the payment is set to drop again, to $500 a week ($1000 a fortnight) for people working more than 20 hours, and to $325 ($650 a fortnight) for people working less.
Businesses will also have to show a reduced turnover each quarter to keep getting the JobKeeper wage subsidy from October. They will have to show that turnover has stayed at least 30 per cent down (50 per cent for big businesses) in the three months to June, and the three months to September.
Treasurer Josh Frydenberg said about 1.4 million workers were expected to qualify for the wage subsidy from October. With 3.5 million workers receiving it now, that would see 2.1 million people lose the subsidy overnight.
Mr Frydenberg said from January, 1 million people were expected to remain on JobKeeper.
Mr Morrison said JobKeeper was always meant to be temporary.
"A scheme that is burning cash, their cash, taxpayers' cash to the tune of some $11 billion a month cannot go on forever, Australians understand that," he said.
He expected some people would shift from JobKeeper to the unemployment benefit, JobSeeker.
JobSeeker is currently $560 a week ($1120 a fortnight), which includes a coronavirus supplement. It is being cut by $150 a week, leaving the payment at $410 a week.
The return of job search rules was not unreasonable, Mr Morrison said.
"I don't believe it's onerous. It's looking for four jobs a month and to re-engage with employment services and not to refuse a job if you're offered one. Now, I think they're very fair - very fair expectations that taxpayers should have," he said.
"It's not unreasonable once we get into this next phase for there to be some basic requirements. I think the ones that were initially coming in are very fair and reasonable."
JobSeeker could not continue at the higher rate "forever", Mr Morrison said.
"It has always been our view that it has to taper back. It has to scale down and work ourselves off these supports because they're not enduring, they cannot be permanent."
The government has extended the supplement till the end of December, but Mr Morrison said he was "leaning heavily" into the idea that JobSeeker would continue at a higher rate than the old unemployment benefit after December.
Part-timers will actually be able to earn more on the JobSeeker unemployment benefit under the new system, with the unemployment benefit now $35 more a week than the JobKeeper wage subsidy for part-timers.
The JobKeeper scheme is costing about $70 billion for the first six months. Mr Frydenberg said the six-month extension of a much more limited scheme would cost about $16 billion.
The JobSeeker top-up is costing about $13 billion for six months, and Mr Frydenberg said the extension to December would cost another $3.8 billion.
Mr Frydenberg, who is from Melbourne, had to join the announcement at Parliament House under special conditions imposed by ACT health authorities.
Mr Morrison said the announcements were not "set and forget" but would change as the situation changed.
"These are very complex issues, there is no one thing that can remove from us this heavy burden that is on the country at the moment," he said. "All things have to be considered."
Mr Frydenberg is expected to deliver an economic statement on Thursday, July 23, and had hoped it would be all about business growth, with the pandemic under control. Under a three-step plan adopted by the national cabinet in May, the economy was to be all but fully open again by the end of July.
But the Melbourne coronavirus outbreak forced a revision of the plans. The government has instead been forced to extend JobKeeper and other supports for businesses that can't reopen fully or reopen at all.
Mr Frydenberg released details of Treasury's three-month review of the JobKeeper wage subsidy on Tuesday.
There are 3.5 million workers in 960,000 businesses receiving the subsidy.
The review found that that just under 900,000 casuals and part-timers were receiving an income boost from the flat $1500-a-fortnight payment - earning much more than they were before JobKeeper started at the beginning of April.
Those workers have been receiving an average pay boost of $550 a fortnight, thanks to JobKeeper.
Treasury also reported that JobKeeper, while it had prevented widespread business closures and job losses, was also skewing incentives to work. Those "adverse incentives" were likely to become more pronounced over time and hold back recovery as the economy recovers, Treasury warned.
It cited claims from industry that workers were refusing extra shifts or even refusing to work at all while they are on the $1500-a-fortnight flat payment - while adding that "no quantitative evidence has been presented on either of these matters".
JobKeeper "distorts wage relativities between lower and higher paid jobs, it dampens incentives to work, it hampers labour mobility and the reallocation of workers to more productive roles, and it keeps businesses afloat that would not be viable without ongoing support", Treasury said.
It also pointed to the problems with a high JobSeeker unemployment benefit, which, at $1120 a fortnight, effectively forming a new "reservation wage" or wage floor.
"An important part of the process of recovery from recession is to let economic resources flow to their most productive use," Treasury said.
"In the labour market this occurs through people switching jobs, moving from businesses that are struggling to those that are growing. JobKeeper can hamper this process."
Mr Frydenberg said the extension to JobKeeper would not save every business, but by tapering the payment and extending the scheme, "we give them the best chance of remaining viable".
Between February and May, more than two million people lost their jobs or lost hours.
JobKeeper will be paid at the lower rate for anyone who worked fewer than 20 hours a week in February 2020. An earlier version of this story referred to January 2020.
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