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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

a flaw in Australia's economic governance « Previous | |Next »
January 8, 2006

The self-congratulatory account of Australia's economic performance---14 years of continuous economic growth-- highlights the floating exchange rates, inflation targeting central bank that has ensured low inflation, budget surpluses, high labour productivity and Australia's ability to borrow abroad in its own currency.

Market liberals say this success is held to be due to neo-liberal governance based small government, free markets and low taxes.This claim is refuted by reality. The Howard Government is a conservative one: it is a big-spending government that favours privatised monopoly's, subsidies for big business, protected markets and big taxes. It is economics in the pursuit of retaining power.

Does that reality leave a question mark over the economic performance? Critics say that a record high current account deficit and the deflating housing market put Australia's continued economic growth at risk and place a question mark over the government's good economic management claim. I've raised concerns about the latter off and on at public opinion.

Yet there is a lack of concern amongst economists and policy wonks about Australia's big current account deficits over the last two decades. So it is good to see an economist also raising concerns. John Edwards, writing in the weekend Australian Financial Review, says:

The foreign exchange risk is not eliminated--it is merely transferred to people in other countries who hold Australian-denominated debt. The currency will swiftly tumble if these buyers think the exchange rate may weaken or that Australian-dollar-interest rate premium over other countries is not longer wide enough to justify the risk.

People just shrug at the mention of Australian-dollar-interest rate premium. It is not a sign of a structurally weak economy, merely the cost of doing business. However, if the Edward's scenario plays out, then the squeeze is well and truly on. This is not taken seriously because of the resources boom due to a booming Australian economy.

Edwards goes on to make a second point about the continual large current account deficits. He says:

Nor does Australia's ability to to borrow in its own currency address the more fundamental problem raised by large current account deficits. The currency risk may be minimised but the servicing costs on foreign debt will soon be a real problem. The only way out of this iron arithmetic is for Australia to export more than it imports--which it has not done other than intermittently for the past 30 years.

That's the big flaw in Costello's economic governance--the failure to run a trade surplus and a current account surplus.

Yet the ALP says very little about this big flaw. It gives Costello a free ride. Suprising isn't it? Maybe it's not raised in the focus groups?

| Posted by Gary Sauer-Thompson at 5:07 PM | | Comments (1)


maybe they don't ask the focus groups about structural imbalances in the's conceivable - just - that they ask "do you think the government is doing a good/great/fantastic/ historically the best ever job of managing the economy?"