Don't give in to hysteria — Australia could quadruple its level of debt and still be better placed than most comparable countries. Alan Austin reports.
AUSTRALIA'S PRIME MINISTER has just delivered an earnest speech similar to that of most of her counterparts around the globe. Though with notably brighter news.
Today’s economic challenges are worldwide. The downturn is continuing. Profits are being squeezed, job opportunities are declining and wages are not rising. Hence government tax revenues are diminishing. Grim remedies are required.
The U.S. president told his nation this in February:
“Most Americans – Democrats, Republicans, and Independents – understand that we can’t just cut our way to prosperity. They know that broad-based economic growth requires a balanced approach to deficit reduction, with spending cuts and revenue, and with everybody doing their fair share. And that’s the approach I offer tonight.”
Prime Minister David Cameron admonished the Brits in March:
“There are some people who think we don't have to take all these tough decisions to deal with our debts. They say that our focus on deficit reduction is damaging growth, and what we need to do is to spend more and borrow more. It's as if they think there's some magic money tree. Well let me tell you a plain truth: there isn't.”
François Hollande addressed the French two weeks ago:
“What I want is genuine budget discipline, essential to reducing indebtedness in the medium term. Unless there’s a commitment in terms of public accounts, there will be no return to confidence and therefore growth. It all goes together.”
While the challenges are universal and the approaches of governments are equally determined, if differently configured, responses in Australia are somewhat bizarre. The reaction of some Opposition and media critics shows an immaturity and crude point-scoring that is, frankly, embarrassing to read or listen to.
Many Australian commentators seem unaware of several highly significant realities.
1. Australia handled the initial impact of the global financial crisis in 2009-10 better than any nation bar none. No other government responded to the first shocks with the same mix of cash handouts and rapid infrastructure spending. Poland came close. No other nation avoided recession, widespread job losses and cuts to services and benefits. Poland came second.
The Gillard Government appears to be responding appropriately now.
2. Australia is clearly better off now than anywhere else in the world. On all economic indicators Australia is streets ahead of whoever is second. Some claim this is Switzerland, others Canada. Norway and Israel are sometimes mentioned also. None has anywhere near Australia’s sustained growth, strong productivity, strong currency, excellent economic freedom, low inflation, low unemployment, low debt, and well-placed interest rates, pension levels and superannuation.
3. Australia is also better off than at any time in its history. Yes, there have been brief periods of more rapid growth or lower deficits. But never before top ranking in the world on all the major indicators.
4. The present revenue slump is not of the Government’s making. In fact, treasurers and heads of state here in Europe and elsewhere wish they had Wayne Swan’s problems.
5. Debt and deficits are not accidental outcomes. They are deliberate strategies. Governments in free enterprise economies can decide how much to borrow and how much to spend. They can also vary the money supply, interest rates and tax rates. They cannot, however, control consumer demand, export levels, company profits and taxation revenue.
Many Australian commentators seem confused about what outcomes they actually wish to achieve. Is it employment, income, and security for retirees and those dependent on support? Or education, infrastructure and productivity for future economic development and growth? Or is it to have zero borrowings and zero deficits as desirable ends in themselves?
6. Australia has plenty of room to expand its borrowings in future budgets. More than any other OECD country, except perhaps Estonia.
Debt to GDP is currently only 20.7%. This is the lowest of all OECD nations except Estonia and Chile.
The UK, Germany, France, Hungary, Israel and Canada are all above 80%. The USA, Belgium, Ireland, Italy and Singapore are close to 100% or above. Japan is above 210%.
Australia could quadruple its current borrowings and still be better placed than most comparable countries.
In fact, now is the perfect time to increase borrowings. Interest rates are low, current debt is low, growth and income are assured and Australia has for the first time ever the top international credit rating.
7. Demand for Australia’s exports has not declined. It has simply stopped growing at the recent rapid rate. And prices have come off their unrealistic earlier highs.
Demand from China has now stabilised, but at a relatively high level. China’s economic growth has declined from the extraordinary heights of 2010, but remains above seven per cent. This is more than enough to ensure steady demand for Australia’s resources well into the future.
8. The downside also has an upside. Yes, the strong Aussie dollar has hindered exports. No question. That’s a headache for the trade minister as well as Australia’s exporters.
But the advantages of a strong dollar more than compensate. It is boom times for importers. And for travellers. This is the best chance Australians have ever had to see the world. You can buy 100 British pounds for 153 Aussie dollars today. In 2001, that would have cost A$304.
So come to Europe. You will see the boulevards of Paris, the Eiffel Tower, the vineyards of Provence, London Bridge, the British crown jewels, the canals of Venice and the galleries of Rome. You will also see starkly how incredibly fortunate Aussies are relative to the rest of the world.
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