Australia’s foreign debt blows out to $1trillion

Contributed by Joe Montero

Ratings agency Standard and Poors has just warned that Australia’s foreign debt level has crossed over to the “extreme,” and is now at $1.045 trillion, up $28 billion in the June quarter alone.

Australia is not alone in this. Global debt stands at 225 percent of global Gross Domestic Product (GDP). This means that two and a quarter times what is created is being spent. It is not sustainable and crunch time must inevitably come, unless there is a change to these proportions.

The key to Australia’s performance lies on whether the rise in the foreign debt is more than offset by a growth in our own GPD. Here there is a problem. Experts differ on what the June accounts say. The answer depends on the method used for calculation. Consequently, the claims have varied from a high of 3.3 percent increase to low of 0.4 percent.

A vital consideration is whether the calculation is based on income or expenditure. With both it depends on whether it is calculated on the basis of a base value for the Australian dollar, or on current value. The answer depends on which definition of money is used. The ABS uses current value and abroad interpretation of money. Most important is what is included. For instance, if part of the rise in the foreign debt is included, this part will be shown as a contributor to the rise of the GDP as well. In the end there is considerable flexibility, which provides politicians and officials to use the numbers that best suit their purpose.

Rather than business transactions, the most accurate way to calculate GDP is on the basis of output in real money terms. Australia does not do this.

Even with a flawed version, Australia’s longer term performance has been flat at best. Aside from the obvious rise in the costs of dwellings, much of any increase in GDP in the June quarter has been taken up by the increased cost in medicines and government spending on infrastructure and defense.

Australian  debt rose from $61.4 billion to 66.4 billion over the quarter, an increase of almost 7.5 percent. This means Australia spent more than we earned. Gross Domestic income actually fell by 0.2 percent over the period. This inability to generate the growth required to service foreign debt is serious problem.

The International Monetary Fund (IMF), in its response to the current state of the global economy has urged developed economies like Australia to “confront significant economic slack and a weak inflation outlook, with further downside risks in this more uncertain environment. To address these challenges, a combination of near-term demand support and structural reforms to reinvigorate medium term growth remains essential under the baseline”.

In other words, more government expenditure (fiscal policy) to stimulate demand and growth, rather than an over reliance on monetary policy through the central banks (managing the interest rate and money supply). This is the opposite to current government policy and practice. Regardless of what one may think of the IMF, there is at least in its position, an implied recognition of the seriousness of the situation globally, and for individual countries that will not be fixed by government cutbacks.

Standard and Poors contradicts this by saying that savings need to be made to avoid a ratings downgrade,  by reducing the government deficit and debt.  If this advice is taken on, it will condemn Australia into an even sharper spiral downwards.

Another point that points to the fallacy of the call from  Standard and Poors is that it is based on the assumption that curtailment of spending will induce more savings, and this will automatically turn into more investment and therefore economic growth. This is the ongoing refrain of austerity economics, based on achieving propelling the process through as redistribution of income to the richest in society. It has not worked this way. Despite considerable redistribution upwards, investment remains flat and focused not on the real, but on the speculative economy.

Australia’s private domestic debt sits at $45.8 billion, while government debt is at $8.8 billion. It is clear from this that making a dent in Australia’s debt problem must in the first place be by means of reducing the level of private debt. Government cutbacks work to raise private debt, just because most households will have to spend more.

Alternatively, more government expenditure will work to relieve households and provide some opportunity to cut back reliance on debt and even to pay some existing debt off. Increased government expenditure will increase economic activity and create jobs that will provide income and therefore demand.

There is yet one vital factor in Australia’s foreign debt scenario.  The debt is not the result of the export and import of goods, which is called the Terms of Trade. It is on the Capital Account. This means the inflow and outflow of money. In terms of debt, this is the claims made on Australia by foreigners.

Big corporations, especially banks, are organised to routinely shift funds in and out of the country. Debts can be claims by the parent company. The Australian government borrows are great deal from overseas. In recent times a major means has been to sell government bonds. A practice that is not helped by falling government capacity to raise revenues and the massive scale of corporate tax avoidance.

Overriding everything, is that foreign investors have cut back drastically on Australia. Just in one quarter, the numbers have tumbled from $5752 billion to $963.6 billion, almost one half. There is a call on existing investments. This is serious, because a large part of Australia’s economy is foreign owned.

Dependency can be tackled. All it needs is the political will. It needs decisive and sufficient government intervention to be a leading force and to raise sufficient funds to carry out programs and through action to reduce excessive money outflows for more investment and less dependency on others.

 

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