Economics: Markets or electorate?by Patrick J. ByrneNews Weekly
, June 3, 2000
Many analysts and commentators judged the Federal Budget, not by what it would do for average Australians, but by how the financial markets would react, Pat Byrne reports.
The reason that government policy must satisfy the markets first and the electorate second, is because the markets can withdraw their capital, which Australia badly needs to keep servicing its massive foreign debt, and reinvest it anywhere in the world with the press of a computer key.
Prime Minister Howard seemed to demonstrate an understanding of this grave situation prior to the 1996 elections. Then he used a travelling debt truck to highlight the threat the growing foreign debt posed to Australia’s sovereignty.
At that time the net foreign debt was $180 billion and the annual interest bill $10 billion. He said that we were one of the most indebted nations on earth. He said that servicing this debt was one of the main reasons interest rates were kept high, so as to keep attracting in foreign creditors. Mr Howard said that tackling the foreign debt would be one of his Government’s first priorities.
However, the ideology of economic rationalism has only one instrument in its policy box to address a foreign debt, and it is a highly ineffective instrument. That policy is privatisation of public assets to raise funds to retire government debt.
The selling of Telstra and other assets has allowed the Government to reduce some of its share of the foreign debt. However, the individuals and corporations who were the Tesltra share buyers, financed their purchases substantially with offshore capital.
Consequently, the total foreign debt has not declined. Government foreign debt has been replaced with private sector foreign debt. Now we are starting to face the more serious consequences of the foreign debt being allowed to blow out to $230 billion.
The fundamental reason for the decline in the Australian dollar comes from continued growth of the foreign debt. Our current account deficit (the amount by which it grows annually) is now higher as a percentage of Gross Domestic Product (GDP) than any other industrial economy.
The effect of a lower dollar is that it increases the size of the foreign debt in terms of the currencies in which we have to repay our creditors, thus increasing the repayment burden of the debt.
Rising world interest rates are also adding to the burden of repayment. This will lead our creditors to start writing us off unless the Reserve Bank increases interest rates to satisfy them.
This is where John Howard is politically caught between a rock and a hard place. If the Reserve Bank satisfies the financial markets with higher interest rates then the electorate will defeat Howard. If the Reserve Bank holds interest rates down relative to the USA, then the financial markets will treat Australia like a banana republic and withdraw their funds, with serious consequences for the economy.
Despite John Howard’s earlier concerns with the foreign debt, in last year’s budget the Government said that the foreign debt no longer mattered.
But it does matter. And it won’t be reduced until an Australian Government confronts it with policies that are effective.
• There has to be a temporary primage duty on all imports until the government section of the foreign debt is eliminated.
• The Government needs to negotiate a fair turnover tax, with multinationals operating in Australia, 60 per cent of whom pay no company tax in Australia and the rest pay hardly any. This would have been a far simpler way of raising revenue than the GST.
• The Government has to implement measures to bring back to Australia the $80 billion invested by superannuation funds offshore. This money needs to be reinvested back in Australia, in part used to refinance private sector foreign debt.
• Australia badly needs a Singapore-style savings system, where people save for their housing, health and retirement needs, while creating a national savings pool that would help make the nation self-reliant in capital, and largely independent of the foreign financial markets.