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Implications of Australia's increasing debt levels; measures recommended to address the problem

PETER THOMPSON: Now to Australia's declining place on the world economic totem pole. Australia's net foreign debt has now risen to $108 billion which is equivalent to one third of the nation's GDP, and as we reported yesterday, Moody's has downgraded Australia's credit rating from AA1 to AA2. Despite this bad news, the Australian dollar has risen sharply in trading overnight, it's up 1.5 cents against the American dollar, following a huge selloff of American dollars on foreign markets. Well, few people are better placed to assess the changing world economic prospects than David Henderson. Mr Henderson is the Head of the Department of Economics and Statistics at the Organisation for Economic Co-operation and Development, the OECD, in Paris. Last night in Sydney, he delivered the Copeland Memorial Address for the Committee for the Economic Development of Australia. Good morning Mr Henderson, thanks for coming in.

First of all, increasing debt levels, are they a worry, should Australia be concerned?

DAVID HENDERSON: I don't think the situation has changed very much, recently. I don't think it's a matter for great concern, no.

PETER THOMPSON: So a debt which ...

DAVID HENDERSON: I think the current level of the current account deficit is higher, I think, than can be sustained and higher than the Government would wish to see sustained.

PETER THOMPSON: And the consequences of that?

DAVID HENDERSON: The consequences are not necessarily very serious.

PETER THOMPSON: Well of course, it's being argued in Australia that a high current account deficit, if it continues, must mean a declining standard of living.

DAVID HENDERSON: No, not true. I don't think the Australian situation is very different in this from the British situation.


DAVID HENDERSON: The British economy at the moment, has a high current account deficit which they are taking measures to bring down, but production is going up, in fact the current account deficit in Britain has arisen largely because standards of living have been rising rather fast in the last year or two. Domestic demand has been rising fast and I think there is some parallel with the Australian situation.

PETER THOMPSON: Well, what are the key issues then, the Government must focus on in Australia, whichever political persuasion that Government is, to keep living standards high.

DAVID HENDERSON: I think the key issues are not the short term issues, which are being so much discussed right at the moment, particularly after the change in the Moody's rating. The key issues concern the direction which economic policy has been taking in Australia in recent years and there I think, there's reason for Australian people to think that things have been going rather well ...

PETER THOMPSON: In what respect? What are the things ...

DAVID HENDERSON: ... as indeed they have in my own country. So some parallel, even though you've got very different Governments in power.

PETER THOMPSON: Well, where should the Government then be given praise for what it's done?

DAVID HENDERSON: I think the Government should be given quite a lot of praise, though it's not alone in the OECD, for what it's done in respect to public finance. It's reined in public expenditure at the Commonwealth level; it's changed around the Government fiscal balance to now a surplus in the public sector borrowing requirement; it's done a lot to liberalise financial markets, as you know - that's been a very drastic program which I think is already probably paying off in better performance. Almost alone, not quite alone - Japan, note Japan, and New Zealand are with them, but there are very few OECD countries that have actually undertaken trade liberalisation in the 1980s on balance, Australia is one. They've done less probably in the way of labour market reform but I think probably that will be increasingly on the agenda.

PETER THOMPSON: So that should be a key agenda item for the future?

DAVID HENDERSON: I think it's one agenda item, although the OECD view, the last survey we did - and by the way, in the next survey, we will be focusing on labour market institutions.

PETER THOMPSON: In Australia, that's an Australian ...

DAVID HENDERSON: In Australia. There's an OECD mission coming to Australia next month - are we still in August, yes - next month, and the report which they are writing will have a special chapter on the functioning of labour market institutions. But, let me just add on that, that quite a few of the changes that they will probably be considering and possibly suggesting, are needed, are changes that relate to the way in which the - don't relate to what the Government's doing but relate rather, to what business and the unions and labour are doing.

PETER THOMPSON: Does the OECD support the move towards more collective bargaining?

DAVID HENDERSON: I don't think we have a view on that. How do you mean more collective bargaining, excuse my question?

PETER THOMPSON: A movement away from the centralised system of wage fixation, which we have in Australia.

DAVID HENDERSON: The OECD has not taken a position on that and in his private capacity - because I asked him - the OECD colleague of mine who knows most about that, says that his personal view is that this, in the circumstances of the Australian economy, this still serves a very useful purpose.

PETER THOMPSON: Mr Henderson, thanks indeed for coming in.