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Australia's foreign debt « Previous | |Next »
May 21, 2007

I read that Dr John Edwards, the chief economist of HSBC bank, has prepared a paper for the Committee for Economic Development of Australia on Australia's export growth and foreign debt. It says that export growth has slowed between 2001 to 2006, whilst over the last decade foreign debt has blow out from $193 billion to about $540 billion now. That is not a good scenario given the resources boom.

Since the paper---Export Weakness, Investment Strength: The changing pattern of Australia's integration into the global economy----is not online we need to rely on the media. According to Kenneth Davidson in The Age Edwards argues that :

.... if Australia wants to stabilise net foreign liabilities at 100 per cent of GDP, it must permanently limit the current account deficit to a maximum of 5 per cent of GDP, and it must do so by running a trade surplus of 1 per cent of GDP. This doesn't look too much of an ask, but given that in recent years Australia has been running a trade deficit of 3 per cent of GDP, Edwards points out: "The move to a surplus of 1 per cent of GDP means that exports have to increase by 4 per cent of GDP or imports cut by 4 per cent of GDP, or some mix of the two."

Australia is running a current account deficit that is forecast to rise from $58 billion in 2006-07 to $66 billion in 2007-08, or 6 per cent of gross domestic product according to the budget papers. Australia's accumulated foreign debt is now well over 50 per cent of GDP.The implication is that the additional debt has to be serviced by Australia.

Does this mean the eventual fall in relative living standards? Perhaps. Since Australia has rarely been able to run a permanent trade surplus, i tis going to be difficult to achieve this.

Yet none of the two major political parties are concerned about this state of affairs. The key issue---will additional investment generate the foreign exchange through increased experts to service the debt liability-- is rarely raised by them or by the media. In an earlier op ed in The Age Kenneth Davidson argues that if commodity prices slipped back to around their long-term average, Australia's current account deficit would be likely to blow out to about 8 to 10 per cent of GDP, depending on how long it would take to adjust domestic demand in order to cut imports of goods and services. Yet the 2007 budget papers remain upbeat about economic prospects both nationally and internationally in the year ahead, despite Australia's growing external imbalance.

Edwards points out that "about half the increased investment in the last decade has been in the construction of houses". Unfortunately, there is only a tenuous link between the quality and cost of the housing stock, and a nation's capacity to export and thus service debt. On the other hand, Edward's argues that part of the offshore borrowing must have been used to sustain the existing capital stock, household consumption and house building ie., it is the household sector that is helping to run the big deficits and building debt.

| Posted by Gary Sauer-Thompson at 2:22 PM | | Comments (18)
Comments

Comments

The foreign debt bubble is the big fat elephant in the room that neither Howard nor Rudd wish to talk about. The interest paid on this debt (outflows) of course adds to the current account deficit. For now things are ok, however if interest rates increase and/or commodity prices fall then this growing debt bubble may cause a crisis of confidence in the Australian economy.

Steve,
Davidson argues that:

the weight of the adjustment must fall on consumption rather than investment because investment is needed either to increase exports or achieve the necessary import substitution to avoid the necessity of the adjustment occurring in the context of a shrinking economy and rising unemployment.

It is suprising that the ALP does not talk about this as it an example of Costello's economic mismanagement. Why the silence? It's almost a free hit.

I think they will roll this out - when they think the timing is right.

They are taking small steps - like Rudd talking up productivity.

Give the populace one piece of economic theory at a time, otherwise you will overhwelm their ability to take it in.

Or they just could be dumb. It's hard to tell with the ALP at times.

BigBob,
Maybe. Productivity provides a solution. Increased productivity from being clever about how we work means more exports.That, in turn, means a way to reduce the trade deficit.

As to the smarts and dumbs inside the ALP I reckon you can say Rudd and Swan. Am I being too harsh?

So I guess that makes Swan and Gillard...Dumb and Dumber

Les,
I would argue that Gillard has the smarts in the way that Swan hasn't. She is countering the mining industry and the big end of town on their attacks of the ALP's IR policy.This has been countered (negated) in a way that allows the AWA issue to continue to bite in the electorate and continuie to cause big problems for the Howard Government.

Swan hasn't been able to undermine or eat away at the Coalition's dominance on economic management. Nor has he raised the issue of current account deficit as a crucial issue. Nothing remotely like the Howard/Costello debt truck of a decade ago.

Swan is probably capable, but not as the front man.

Mark Bahnisch at Larvatus Prodeo has a high regard for Swan, so I assume there is something behind that.

Tanner is a better communicator, and as Costello shows, that is actually what you need for a political Treasurer.

One important thing that Labor also has to get into people's heads is the fallacy of Keating/Beazley's Black Hole. The government constantly spruiks that as one of the potent symbols of Labor economic mismanagement, when in reality, all they have done is shift that debt burden off to all us private citizens directly. If they could also get people to realise that the major reason why interest rates are relatively low now is that they are low internationally, just as they were high internationally during the ALP's reign. It really needs to be hammered home that our interest rates are actually some of the highest in the developed world.

BigBob,
I agree with you re the Keating/Beazley Black hole, high interest rates and the international economy. As Kenneth Davidson argued in the Age

Creating a sense of crisis about Australia's domestic debt after the 1996 election suited the Government's political agenda. Portraying that as a crisis provided the rationale for the sell-off of most the Commonwealth's assets (apart from Parliament House and the War Memorial) in order to pay off net government debt of just over $90 billion.

Australia's interest rates are high in order to attract international capital. We pay a premium for risk.

Swan may be a smart political operator but he is sure low key in fighting Costello, or constructing a convincing economic narrative, or challenging Costello's interpretation on daay to day economic events.

The rightwing ALP gave up a lot of ground on economics under Beazley--vacated the territory as it were--- and the toe they currently have in the water on productivity is due to Steve Bracks National Reform agenda. It is Rudd who picked that up.

Gary,
In response to your comments, I recall Costello hammering Keating over this issue with his famous Debt-Truck analogy back in 1996. Well, the truck has transmuted from a 1-ton pick-up to a 20-ton prime mover in the intervening time.

Steve,
Apart from Kenneth Davidson in The Age, the media is interpreting the Edward's report in a positive manner. Even Lateline Business has done so. It says that the good news is that the remitted dividends from the big amount of Australian money being invested in global markets can be used to service Australia's foreign debt. So there is no need to worry.

Foreign debt is the elephant in the room that no one is talking about. How come it is not an issue?

If as I understand, the foreign debt is "private debt" as opposed govt. debt, doesn't it mean it largely is out of govt control?
If the debt is accumulated through building "houses" how does the statement "Increased productivity from being clever about how we work means more exports." have credence?
fluff

Frank,
yes you are right. We do have a shift from the old days when the states borrowed heavily for development and had difficulty repaying the debt, eg., during the Depression. Debt has been privatised as it were. So people say no worries. Government debt is bad private debt is good.

But debt is still debt and the bankers in Australia and overseas need to be repaid and the interest payments need to be met. Presumably the overseas bankers are lending to Australians because of the mining boom, and not because of the increasing current account deficit.

What happens when things turn down, incomes are static, property prices fall and we cannot repay the debt? Presumably what is now happening in Sydney now. Isn't that the market's way of reducing domestic demand in order to cut imports of goods and services?

If the resources boom ends, then the viable option is to increase exports to earn the money to pay off debt and interest. We need high paying jobs to pay off the big mortgage.

That increase in exports to reduce the current account deficit comes from being clever, not the low wage pathway. Being clever implies productivity that comes from increased skills and education--investing in people.

Does that make sense? It's a better scenario that the reduced consumption one.

Yes Gillard has though missed a very basic point in attacking the Government.
I have been watching the job ads over the last 2 years and have noticed a growing trend of lower spectrum jobs like cleaners, factory, road sign workers have "Must have ABN". There was 20 or so in my last Saturdays employment section. Try ringing others that don't display this statement and you will find that it is quite rife in many industries.
People employed using an ABN have no penalties, no contracts, no loading, no sick days, no holidays, no rights to unfair dismissal, no workers contributions, no super contributions, no rights and are working for around $15 per hour.
So having all these discussions about IR and Workplace is really all just hoo har when you have a back door that both sides is ignoring.
The Coalition because it wants lower pay and conditions and Labor because these people arnt part of a Union.

Thanks Gary, debt whether public or govt. is still debt. Which we of course should be concerned about, Argentina comes to mind.

If we can't manage foreign debt while "the sun shines", private or otherwise, increased productivity can't be what it is judged to be, the answer.
Successful OECD countries have thriving secondary production. Where the hell are ours?
Business needs to educate it's own, it hasn't done for years.
Rather it has said "why should we" its the states responsibility to educate my workforce.
It was not always the case, I was educated by a company, via apprenticeship, the only contribution by the state being one day a fortnight at tech college.
With the profits posted daily surely companies can be expected to contribute more to the permanence of their workforce.

Frank,
the mining companies would be an apt illustration of your point.

If we are to pay off the high mortgages we have incurred then we need skilled jobs.Low wges aren't going to pay for the repayments when real interest rates in Australia are among the highest in the world. The Australian banks need our repayments to repay their debt and interest on the debt to the foreign banks.

Not everybody can work in a mining company in WA, or play the futures market in a bank in Sydney. I suspect that economic insecurity is eating away at us during our prosperity. It is not all sunshine and roses for everyone.

However, education is one area where Australia's spent the past decade resting on its laurels. Both state and commonwealth governments have done this along with companies.

Les,
I agree. The low unemployment rate of 4.4 per cent is caused by the rate of casualisation, which has near doubled in 25 years and now stands at a staggering 30 per cent of the workforce.

It's covered up by saying its choice--people want to work as casuals because it suits them re the family.

Therein lies the flaw of the modern ALP--it ignores the underclass or the working poor. The casualization of the workforce in the form of re shaping them as small business people is a real problem that is not been addressed.

Just had read through this and am convinced it is the best of so many threads I have read at PO.
There are couple of journo voices that cry in the wilderness- many like Dr's Janet McCalman and Hugh Mackay seem already in Siberia.
I think of Steketee, Gittins, fitful bursts from SBS and Radio National, but above all the leading Dissenter, Davidson.
But the field of public discourse as to public affairs has long been in the the hands of the likes of Sheridan, Ackerman, Bolt and Albreschtsen and that favoured group of neolib fanatics from the vile and oxymoronically-titled 'think tanks', starting with Saunders.
Many of these types now do damage on the boards of SBS and the ABC, or other qangos like tertiary research grants councils.
What is to stop Australians continuing in the Never-Never unconsciousness created by the media?
The Conservatives indeed are to be condemned for organising and encouraging it, for the basest of reasons and the ALP, for never having the guts to take on rightwing paradigms.
I'll never forget, for example, Crean and Latham being labelled "anti-American" by people within their own parliamentary wing, like WA rightwinger Sen. Mark Bishop, when they tried to take on Howard over Iraq, early in that piece.

as china has been looking to buy resurces from russia and use their cheap labor australia may soon find less and less demand fortheir resurces . as the manufacturing in aus. is allmost gone this country will be in big trouble.