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Wednesday, 9 February 2005
Page: 73

Senator SHERRY (2:34 PM) —My question is to Senator Minchin, representing the Treasurer. Is the minister aware that Australia’s current account deficit increased to $50 billion in the last 12 months, causing Australia’s net foreign debt to spiral to $406 billion, or almost half the value of Australia’s gross domestic production? Is the minister aware that last November the International Monetary Fund warned the government about the ‘potential risks stemming from the sustained high current account deficit and the build-up of external private debt’? In light of this authoritative warning on Australia’s economic risks, why has the Howard Liberal government taken absolutely no action to bring the current account deficit and foreign debt under control?

Senator MINCHIN (Minister for Finance and Administration) —I appreciate the opposition’s new-found interest in economic matters, and we look forward to that continuing for the next three years. We welcome their cooperation in helping to maintain the Australian economy as one of the strongest economies in the world. Senator Sherry is broadly right about the statistics. We are running a current account deficit of approximately six per cent of GDP. There are some pretty clear reasons for that. One of the obvious reasons is the very strength of this economy relative to other economies in the world. That has been highlighted by the OECD in their recent report. There is a desynchronisation, as they describe it, between the Australian economy and the global economic cycle. That means that to the extent we are growing much faster than other countries in the world we are sucking in imports, given the strength of domestic demand, and there is a limited market for Australian products, given the situation in other markets around the world. We have a strong currency at the moment, which is affecting the current account. We also have the consequential effects of things like the drought which have limited Australia’s exports for natural reasons.

There are clear reasons why we have had a situation where imports are running ahead of exports, and that has produced a current account deficit. It should be kept in mind that Australia has a very clear and strong capacity to service that debt. The debt-servicing ratio—that is the proportion of our export earnings required to pay interest on our debt—was nine per cent in the September quarter. That is well below the debt-servicing ratio peak of some 20 per cent we had under Labor in 1990. Our capacity to handle that deficit and the debt is acknowledged around the world.

We have also restored Australia’s AAA credit rating, which was lost during the Labor years. So we are in a much better position to deal with that debt. Australia does have the situation where the desynchronisation of our growth rates has produced a current account deficit situation, albeit virtually all of it is in the private sector, which is another point that should be borne in mind by Australians and by the opposition. The federal government are not contributing to this. We have dramatically reduced the federal government component of foreign debt from that we inherited from Labor.

But all this does is highlight the critical importance of continuing the program of economic reform. If we are to ensure that Australia can sustain its strong growth rates without a dangerous blow-out in our current account deficit we have to sustain the flexibility and productivity of the Australian economy. To the extent that the Australian growth rate is such that we are importing, we have to be able to produce exports which the world wants and can buy and which we produce productively at prices the world can afford. That critically underlines the importance of the ongoing reform of our industrial relations system. We must get greater flexibility in our labour markets if we are to increase the productivity and flexibility of the Australian economy to allow it to take advantage of opportunities internationally.

The other thing that must happen is that our six state Labor governments must wake up to their responsibilities with regard to microeconomic reform and allow the flexibility we need in this economy to ensure that our exporters can get their exports out of Australia. A lot of the problems we are having at the moment with getting exports out of this country relate to state government responsibilities with transport infrastructure, ports et cetera. We have enormous pent-up demand for our products. We want to get them out. There are problems at the state level. I look forward to the Productivity Commission’s report on microeconomic reform responsibilities. I look forward to the federal opposition joining us in driving microeconomic reform. (Time expired)

Senator SHERRY —Mr President, I ask a supplementary question. Is the minister aware that when in opposition the current Treasurer claimed that foreign debt, which was then less than half its current level, posed a serious threat to mortgage interest rates? Given that family mortgage payments are already at record highs, how can the government justify its current complacency?

Senator MINCHIN (Minister for Finance and Administration) —Senator Sherry speaks on behalf of a party which is the world expert in high interest rates. What the Labor Party did back in the late eighties and early nineties when it had economic problems was to clobber the economy. So what is Senator Sherry saying? Is he saying that the answer to the current account deficit is to clobber the economy like the Labor Party did when in government? Should we whack up interest rates to 17 per cent, 18 per cent or 20 per cent, drive hundreds of thousands of Australians out of jobs and destroy the economy? No. We want a highly flexible employment-creating, job-generating economy and we want the Labor Party to join us in ensuring that that can occur.