EDITORIAL: by Peter WestmoreNews Weekly
Australia's economy after the Budget
, May 21, 2005
The Howard Government has kept the Australian economy hooked on foreign borrowing to drive consumption and growth. It seems unconcerned about tackling the problems of Australia's deteriorating trade position and massive $420 billion foreign debt.The Federal Treasurer, Peter Costello, released the Budget last week shortly after the latest trade figures were released, showing that in the month of March, Australia's trade deficit reached nearly $2.7 billion - far worse than financial markets had anticipated, and the second worst monthly deficit on record.
The Government seemed more concerned about how to spend the Budget surplus than how to address the deep underlying problems which exist in the Australian economy - symbolised by surging national debt - which will simply not go away.
March's trade deficit, $400 million worse than for February, continues the deficits which have accumulated over the past 41 months. In the last quarter of 2004, net foreign debt passed $420 billion, more than 50 per cent of Australia's gross domestic product, and continues to rise.
Although the Treasurer shrugged off the latest figures, suggesting that it was a matter for the private sector, economists are not so complacent."Horrendous"
"There is no light at the end of the tunnel for the horrendous trade position," TD Securities chief strategist Stephen Koukoulas told the Australian Financial Review
. "A deterioration in the trade deficit at a time when commodity prices are booming, when global growth is strong, when the terms of trade are at a 30-year high, is a reflection of a poorly performing economy," he added.
David De Garis, chief economist for the ANZ Bank, told ABC television's Lateline
that "the current account deficit for the March quarter will be something like 6.75 to 7 per cent of GDP, which is a very, very large number for Australia, historically speaking." He added, however, that following recent increases in export prices for coal and iron ore, he expected the figures would rise in the June quarter.
The latest trade figures were worsened by the sharp rise in the price of petroleum, reflecting the higher prices of petrol and diesel at the pump, and falls in agricultural exports, including grains, beef and wool.
Unfortunately, there is no consensus among economists as to how long Australia can continue to add to its trade deficit and foreign debt. There is no common understanding regarding the nature, causes and consequences of large and persistent trade deficits.
The US foreign debt continues to grow, and lenders from Europe, Japan and China continue to feed it, by buying US dollars. Several European countries have foreign debts even higher than Australia's, as a proportion of GDP.
What is agreed is that the current account deficit is unsustainable when it leads to a sharp increase in domestic interest rates, a rapid depreciation of the currency, or some other abrupt domestic or global economic disruption. In other words, a country only knows that its debt levels are unsustainable when the foreign lenders have "pulled the plug", sending the economy into a downward spiral, from which it is "rescued" by bodies such as the International Monetary Fund.
The IMF effectively takes control of the economy to enforce painful economic disciplines to address the underlying causes, as it did to Indonesia after the Asian economic meltdown in 1998, and has done to many Latin American countries.
However, it is generally accepted that a current account deficit higher than 5 per cent of GDP is unsustainable (Australia's is now approaching 7 per cent), while a net foreign debt-GDP ratio of 12 per cent might suggest that the country's external position is equally unsustainable (Australia's is over 50 per cent).
What is most worrying is that neither the Reserve Bank nor the Federal Government seem concerned about the problem, leaving open the possibility that it will solve itself through a flight of foreign capital, pushing up domestic interest rates, causing a serious slowdown in the domestic economy, choking off the demand for imports, but lifting unemployment.Warning
In its quarterly statement on monetary policy, the Reserve Bank recently warned that Australia could be caught in the vice of increasing global interest rates. It pointed out that these could substantially raise the cost of servicing Australia's foreign debt.
What has happened in Australia over recent years is that the country's growth has been fuelled by imported capital which has largely been wasted on consumer goods, and which has also pushed up the price of houses in Australia's capital cities.
What is urgently needed is a government plan for sustainable long-term growth in manufacturing industry (to assist import substitution), and targeted support for both the mining and agricultural industries, as these industries are the engines of Australia's exports to the world.
However, there are few signs that the Australian Government, which is hooked on foreign borrowing to drive domestic consumption and growth, is prepared to take the long-term decisions necessary to address the serious problems which have emerged in our economy.
- Peter Westmore is president of the National Civic Council.