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Australia's foreign debt and Labor's denial

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(Pete r C os te llo D e p u ty L eader of th e O pposition S h a d o w T re a s u re r



This morning on ABC radio Mr Willis launched Labor's campaign of denial on the link between foreign debt and interest rates. If there is no link presum a bh Mr Willis would be happy to increase foreign debt further!

In reality it is a desperate move by a Government more intent on misleading the public than owning up to its own mistakes.

His claims of today are exposed by the Prime Minister's statement only yesterday.

Yesterday at the agribusiness seminar at Orange Mr Keating said of the current account "we must work to deal with the problem so we're not paying too high a premium on world interest rate markets."

It is no coincidence that Australia has the highest current account deficit in the OECD, and the highest bank prime interest rates among the developed economics surveyed by The Economist.

In his 1993 report to the Government on national savings. Dr Vince FitzGerald said:

"we need to pay higher interest rates to compensate for the risks inherent in our high external debt."

He also noted that "while it is true that some sections of the Australian community - for example households - have not greatly increased their debt, to an important extent 'we arc all in the same boat'. Foreign financiers, in rating sovereign debt, correctly see the various sectors of the domestic economy as linked."

The OECD noted in its report on Australia released in June this year that "the widening current external deficit", which leads to higher foreign debt, exerts "significant upward pressures on Australian real long term interest rates."

This year's Budget Papers circulated by Mr Willis said "a high level of foreign borrowing relative to GDP can impose costs on an economy by making it more vulnerable to external shocks and by raising interest rate premia on borrowings."

Inevitably, higher interest rates on foreign borrowings will flow through to the home mortgage market and the business lending market as banks hold a large portion of Australia's foreign debt.

Labor is desperately trying to escape culpability for Australia's record $ 180 billion of foreign debt.

P a r l ia m e n t H o u s e , C a n b e r r a , A.C.T. 2 6 0 0

The Government blames the private sector for the run up in debt..

The reality is that the Government has only itself to blame. There is a direet connection between Commonwealth policy and Australia's foreign debt.

in a speech last year the Government's savings adviser Dr FitzGerald stated:

"In short, the foreign debt position of Australia, and for that matter the current deficit - which is dominated by interest payments on the past accumulated debt - arc attributable only to a small extent if at all to private sector net borrowing:

rather they are essentially attributable to government, and indeed to a significant extent represent borrowing to finance public consumption rather than investment - at least at the Commonwealth level."

(Saving. Investment and Growth: A Retrospective on the Debate. V W FitzGerald. Paper Presented to the 23rd Conference of Economists. September 1994)

Dr FitzGerald hit the nail on the head. These arc the facts:

1. As at the end of June 1994. 30.3% of gross foreign debt had been issued by the public sector. Of this amount. 1 1.1 % had been issued by the Commonwealth general government sector and the Reserve Bank. Another 7.9% had been issued by Commonwealth enterprises.

2. But far more importantly, the Commonwealth's massive borrowing within Australia to fund its budget deficits has crowded out private sector borrowers and forced them to go overseas to secure loan funds.

The role of the Commonwealth in crowding out the private sector and pushing it offshore is vital to understanding the cause of Australia's foreign debt problems.

There are only finite funds available in Australia to be borrowed. If the combined demand for loan funds from the public and private sectors exceeds this amount, the excess has to be satisfied from overseas sources. This is the case in Australia.

For example, since 1991. Commonwealth debt has risen by over $60 billion, while net foreign debt has risen by S37.7 billion. If the Commonwealth's call had been $37.7 billion less then the amount sought offshore could have been supplied domestically. Over this period, the Commonwealth has more than fully accounted for the entire

increase in foreign debt.

Every dollar the Commonwealth borrows in domestic markets is one less dollar that the private sector can borrow in Australia and one more dollar they will have to borrow overseas.

The bottom-line is this: budget deficits results in government borrowing, government borrowing crowds out the private sector, if the private sector is crowded out of the

domestic loan market, it goes overseas for funds, and these foreign borrowings add to foreign debt.

As Mr Keating and Mr Willis try to escape their culpability, the Federal Coalition w ill continue to remind the Australia people that after twelve year of Labor:

• Australia has a record level of foreign debt of over $ I SO billion. When added to foreign equity of over $79 billion. Australia's total net foreign liabilities stand at just under $260 billion. This is just oxer 5 times the level in 1983.

• Australia's current account deficit for 1994z95 reached a record $26,855 billion. Australia's current account deficit for 1995 is projected to he worst in the OECD - worse even than Mexico. Standard and Poors reports Australia ranks 49 out of the 51 countries it surveys.

• When Australia's current account deficit blew out to 6.2% of GDP in 1989. comparable deficits were recorded by Finland (5.1%). the United Kingdom (4.4%) and Canada (4.1°»). However, for 1995, the OECD projects that these nations have been able to get on top of their current account problems. The projections

arc: Finland - cument account surplus of 1.8°i>. United Kingdom - deficit of 0.1 % and Canada - deficit of 2.2%.

• Labor's twin failures in the areas of foreign debt and the current account has placed a limit on economic growth - growth needed to improve living standards and provide employment opportunities.

• Labor's failures have also resulted in our interest rates being far higher than they arc in many of our competitors. The latest edition of the Economist magazine shows that Australia's bank prime interest rates are the highest amongst the 15 major industrialised countries listed.

End Release: Contact:

21 September 1995 Anthony Smith (06) 277 40 45 (018) 324 009 (AH)