EDITORIAL: by Peter WestmoreNews Weekly
Net foreign debt soars towards $500 billion!
, March 18, 2006
Government "experts" remain complacent about Australia's mounting debt, writes Peter Westmore. Our overseas creditors, however, may take a different view
.At some time over the next couple of months, Australia's net foreign debt will pass the $500 billion mark, highlighting the fact that Australia's level of international indebtedness is spiralling upwards, while the Government sits on its hands.
Figures released by the Australian Bureau of Statistics in February show that, at the end of December 2005, Australia's net foreign debt had risen to $473 billion. It was only about $180 billion when the Howard Government came to office 10 years ago.
Australia's vulnerability is highlighted by the fact that $262 billion of the foreign debt is "hot money" from the financial markets, due for repayment in less than 90 days. A further $92 billion falls due in less than a year. The Australian economy relies on the willingness of international lenders to reinvest their money as it falls due.
If foreign lenders lose confidence in the Australian economy and curb their lending, the effects would be felt immediately.
Although there has been little recent debate in Australia over the size of the current account deficit, this issue has raised many concerns in the US, which is facing the same problems of a soaring current account deficit, but exacerbated by a huge federal debt.Increasing concerns
An American economist, Professor Sebastian Edwards from UCLA (the University of California, Los Angeles) said last year:
"During the last few years, a large number of analysts in academia, the private sector and applied research institutions have expressed increasing concerns regarding the growing US current account deficit. There is a generalized sense that the current situation of global imbalances is unsustainable and that adjustment will have to take place sooner rather than later.
"The unprecedented magnitude of the US current account deficit and the growing net indebtedness of the US have fuelled analysts' worries, with many arguing that unless something is done, the world will move toward a major financial crisis.
"Some authors have gone as far as suggesting an imminent collapse of the US dollar, and a global financial meltdown."
Edwards said many economists believed that, with the ratio of current account deficit to GDP of 6 per cent, the US was moving into "uncharted waters".
Australia's current account to GDP ratio is now worse than America's, having been over 6 per cent since the end of 2004.
Professor Edwards concluded that continuous large current account deficits are unsustainable, and when lenders lose confidence in an economy, the effect is a serious disruption of the domestic economy, and "deep GDP growth reductions".
The Australian Treasurer Peter Costello and his advisers reject this view, arguing that, as the foreign debt is private - between "consenting adults" is their language - it is largely a matter of indifference to the Federal Government. They further argue that the deficit is balanced by capital inflows, including investment capital.
Commenting on the latest figures, Mr Costello said the "character" of Australia's foreign debt had improved, as it was almost entirely made up of private sector liabilities, after the Federal Government spent years reducing Commonwealth's debt.
"We are now on the verge of eliminating Government debt," he told the National Press Club.
Mr Costello said that the level of private sector debt was not a problem. "It can be used for good outcomes, in ways that boost the economy."
In this, he echoed the view of some prominent economists, including Samuel Brittan, one of the UK's leading economists, who argue that balance of payments deficits should be left to the financial markets to sort out.
The Governor of the Reserve Bank, Ian Macfarlane, has taken a similar view. He argued that, while countries with balance of payments surpluses, particularly those of Asia, are willing to invest in countries like Australia and the US, there is no reason for central banks to impose restrictive monetary policies (e.g., lifting interest rates).
The problem with a hands-off approach is that when the financial markets take fright, as they did at the time of the Asian economic collapse in 1998, "hot money" may exit the country.
Should this happen, the Government will have to increase interest rates to keep money in the country, with immediate adverse effects on the housing industry, credit card debt, business and investment. The consequent rise in unemployment will be almost immediate.
Alternatively, there could be a sudden fall in the value of the Australian dollar, with severe inflationary consequences.
The Government's current thinking seems to be that this is a problem for another time, and perhaps another government. If so, its failure to address a problem which has been mounting for years will only make the solution, when it comes, even more difficult.
It is not a good legacy for John Howard, who has just completed 10 years in office, and is looking forward to his fifth successive election in 2007.
- Peter Westmore is national president of the National Civic Council.