Being in debt by a trillion dollars-not bad

1st July A trillion dollars in debt, but no ‘banana republic’

On May 14th 1986, then Treasurer Paul Keating delivered a speech warning that Australia was in risk of becoming what he coined, a”banana Republic.”

This speech was a reaction to the biggest Current Account Deficit Recorded(CAD) and indeed, low commodity prices, high government debts and high interest rates were crippling the economy. Since then, Keating introduced his reforms to liberalise the economy, including privitisations, wage decentralisation and the dollar was already floating.

Nowadays, Economists have long since stopped worrying about the size of Australia’s current account deficit – that is, the balance between what we receive for our exports of goods and services, minus what we pay out for imports, and minus again what we tend to pay out, in net terms, to foreigners as dividends and interest payments on borrowings.

As long as government debt is under control, most economists are happy to see our persistent deficits with the world as the decision of “consenting adults”(Pitchford Thesis) from the private sector, who simply see more opportunities for investment in Australia than can be funded by domestic savings.

However, there has been a recent change in the past year-a shrinking current account deficit, which today sits at less than 1 per cent of GDP.

It is possible that Australia may turn into a country of Current Account Surpluses-where we save more than we invest

What are the reasons for the Current Account Surplus?

  • Recent Surpluses on the trade balance part of the Current Account (an increase in export revenue)
  • An increase in net income
  • Lower interest rates-thus lower interest payments made by Australians to foreign investors
  • Lower Commodity prices decreasing Mining company profits thus decreasing the dividend payments to the foreign owners of the company
  • Due to compulsory superannuation-An increasing share of that money has been invested offshore into foreign shares and assets, bringing dividend and other receipts coming home to balance all those going offshore.
    • Because of this Australians now own as much foreign equity as foreigners own of Australian equity

Overall, there has been a shift in the Current Account balance-from deficits to possible surpluses. However, after a period of below average growth, what Australia needs is a period of private sector investment as a means of running higher CADs than otherwise.

 

 

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