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Wednesday, 9 February 2005
Page: 107

Senator MURRAY (4:32 PM) —Senator Sherry’s matter of public importance concerns Australia’s high current account deficit and the prospect of high interest rates. It may not be true, because we have no way of knowing what private discussions Treasury have with the Treasurer and other ministers, including the Prime Minster, but I do get the impression that the current account deficit has only just drifted onto their list of issues to be worried about.

It is always bad management to take action only once something is a full-blown problem, when the warning signals have long been known. One thing all economists and financiers understand is that in the long run a high current account deficit is not sustainable. There will be a nasty correction if it is not addressed. Of course, long run can mean the very long run; hence those who say, ‘Live for the day.’

The international dimension will always impact on Australia’s economic prospects and the decisions Australia takes. The largest cloud on the horizon is represented by the United States of America. A radical American fiscal policy under the Bush administration has turned a sound financial position inherited from President Clinton into one that has elevated world concerns at their high current account deficit and the capital flows consequent to that.

The government cannot deny the first part of Senator Sherry’s MPI, which notes that the current account deficit and foreign debt are at record levels. Net foreign debt, mostly private debt, is now at $406 billion, or 49.2 per cent of GDP. It averaged only 34 per cent of GDP during the Hawke-Keating government and seven per cent during the much maligned Fraser government. The current account deficit is now running at $15 billion per quarter, or six per cent of GDP. The Reserve Bank on Tuesday noted that the current account deficit is likely to hit 6¾ per cent of GDP in the December quarter—a steep rise.

To put this in context, the current account deficit averaged only 1.4 per cent of GDP during the also much maligned Whitlam government and 4.6 per cent during the Hawke-Keating era. The very reputable John Edwards at HSBC said in their weekly bulletin in September 2004:

It has attracted very little attention but over the last four years Australia has experienced its biggest investment boom in well over forty years.

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Since the end of 2000 the volume of investment has increased 41%.

Australia often has upswings in residential construction, or in mining investment or in infrastructure or in general business investment. The reason for the big boom is that for most of the last four years there has been an upswing in all these categories.

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The arithmetic of national accounts tells us that domestic investment minus domestic saving will be equal to the current account deficit. It is more often than not the case in Australia that an investment boom coincides with a sharply wider current account deficit.

Later on, he went on to say:

We continue to be puzzled ... by assertions that Australia’s export performance is failing. It is true that Australian exports fell from 2000 through to the middle of last year because of drought, currency appreciation and the global slowdown. It is true that decline contributed to the widening of the current account deficit.

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The real weakness over the last year was in oil and gas exports and in metals—precisely the categories which have more recently benefited from China’s import demand.

Mr Edwards is a clever man, and apart from the virtue of recording his opinion, these remarks show there is much argument over where our current account deficit is going and what it really means to Australia.

On Tuesday the Prime Minister said he was ‘not the least bit pessimistic about our capacity through export performance to reduce the imbalance and what is a very large current account deficit over a long period of time’. Given that Mr Howard was elected on economic management, a sceptic might say, as that famous lady once said, ‘Well, he would say that, wouldn’t he?’ Unfortunately, the Reserve Bank is not quite so optimistic. They note:

Growth in Australia’s export volumes has remained weak over the past year or so, despite the growth in global demand and world commodity prices, with total exports virtually unchanged from four years ago.

Any economist will tell you that the numbers themselves do not necessarily reveal the true impact of the current account deficit on interest rates. If the capital inflows allow Australians to invest in new plant and equipment, social and economic infrastructure, and education, research and development, in the long term this will improve Australia’s trade performance. This is the so-called J-curve. It is what the capital inflows are used for that helps to affect interest rates. Unfortunately, this government has reduced relative spending on education and long-term research and development. We are below the OECD in those fields. Surveys show that our nine governments have underinvested in productive infrastructure. Worse, they have allowed essential infrastructure, such as for power, water, rail and ports, to deteriorate.

Much of the capital inflow has funded consumer spending and the property investment boom. Interest rates have already risen precisely because of those reasons. Neither of these items improves our trade performance or productive capacity that much, but they have been encouraged by the government with their tax cuts for high-income earners, negative gearing and capital gains tax concessions and the $66 billion of budget and election pump priming. Those are electorally popular, but we have to recognise that along with the upsides there are downsides. Consequently, the Reserve Bank have warned that we are likely to face higher interest rates to cool rampant consumer spending and reduce inflationary pressures. Note that it is not to cool investment spending but to cool consumer spending.

The Australian Democrats do not want to see higher interest rates or a slowdown in the economy. We recognise that Australia’s trade figures are likely to continue to worsen, at least in the short run, including as a result of last month’s tariff reductions for imported cars, clothing and other goods. The only way to improve our trade predicament is to boost exports and productivity and the Australian government has to make this happen. The alternative, of course, is to reduce imports. That will have the effect of lowering our economic performance. You actually want to lift the exports, not lower imports overmuch, although there is a case for imports being lowered.

The government’s policies of winding back the export market development grants, reducing incentives for research and development and reducing tariffs without equivalent foreign tariff reductions have contributed to Australia’s poor trade performance. The Australian Democrats have been right at the forefront of responsible macroeconomic reform, and we have experienced some criticism for supporting the coalition in some of those areas.

We do have policies that we think would help improve Australia’s trade performance. Amongst them are these. We recommend freezing further tariff reductions unless they are matched by our key trading partners. We would restore full funding to the Export Market Development Grants Scheme. We would like to see a review of business taxes and capital gains tax not only to make them more efficient but to encourage longer term productive investment rather than short-term speculation that results in short-term profit taking. We would restore the tax deductions for business research and development to 150 per cent. We would advocate putting much more money into public education and training to address Australia’s skills shortage. We would improve the low participation rate of women in the Australian work force by promoting more family-friendly policies such as paid maternity leave and low-cost child care. We would encourage the move from welfare to work by raising the tax-free threshold significantly and improving the disposable income of low-income earners. We strongly support much needed infrastructure expenditure. We stand shoulder-to-shoulder with the National Party in our belief that the rail infrastructure in this country badly needs further investment.

The Democrats believe that the Howard government should include improving Australia’s export performance as one of its key priorities for its fourth term. There does need to be a consensus of all our nine governments on what it would take to produce significant structural reform to improve our trade performance. There has been some discussion about IR, but we should never forget that much of the infrastructure is in the hands of the states. It is in their hands that our export destiny lies. The Howard-Costello government may feel they are in a strong position now. History tells you that the strong can be weakened. Having your eyes wide open in the good times may save them becoming bad times.