PREFACE
"Australia In Hock: The Way Out", published in May 1988, drew attention to the fact that Australia's external debt had reached levels which were at or close to previous historical danger points and which had gone past the early warning points used by international private sector financial institutions to adjust their lending policies. It argued that the Government should set a three year program to reduce external debt ratios back to those early warning points and suggested a program of policies to achieve that by a combination of reduced spending and increased output, with emphasis on the latter.
At that time, net external debt was about $90 billion or 30.6 percent of GDP and it increased to around $108 billion or 32 percent of GDP by June 1989. This increase occurred notwithstanding that the terms of trade continued until the June quarter of 1989 to move strongly in Australia's favour. On the basis of the 1989-90 Budget forecasts net debt will probably exceed $125 billion or 34 percent of GDP by June 1990.
During 1988-89 the Treasurer acknowledged that reducing the current account deficit was a top policy priority. However, neither he nor other Government Ministers made any significant attempt to explain the reasons for the debt problem or its implications for the average Australian. In particular, little attempt has been made to explain why debt ratios have continued to increase since the initial downgrading in Australia's credit rating in September 1986. The Treasurer's statement that there was no justification to Moody's second downgrading in August 1989 indicated an unwillingness to fully face up to the problem.
However, the Government did respond to the current account situation by tightening fiscal and monetary policies during 1988-89 and the situation has now been reached where the public sector has become a net saver rather than a net borrower. The tightening of monetary policy has reached the point where it seems almost certain that lower demand will depress the growth in spending to well below the growth in output by the end of 1989-90. As a result, it is quite probable that Australia will experience a recession. At the same time, little change has been made in respect of other policies identified in the May 1988 paper as requiring adjustment to improve supply. Accordingly, Australia now faces the prospect of an extended period of stagnation in living standards because spending will need to be suppressed by a combination of tight fiscal and monetary policies.
An important omission from the debate on debt is that there has been no substantial discussion of what external debt ratio or ratios might be targeted as being sustainable on a medium term basis. Discussion has, rather, focussed on the implied growth in exports and imports of goods and services needed to reduce the current account deficit to the point where the ratio of net external debt to GDP would be stabilised -- and the rate at which the economy might be slowed to achieve that.
By contrast with the wide acceptance that a serious debt problem exists, some academic economists have expressed the view that, with the elimination of net borrowing by the public sector, the Government should not have any particular net debt ratios as a policy objective. The private sector should be left to make judgements about investment and saving on the basis of its assessment of investment opportunities and of decisions about the spreading of consumption over time. Macro-economic policy should thus be concerned only with ensuring that the level of demand does not produce higher inflation. Any distortions to private sector decision-making as a result of other government policies should be removed by changing those policies, not by suppressing spending.
The question might thus now very well be asked -- where do we go from here? Should the Government continue to rely on policies to suppress spending and, if so, for how long might such policies need to be sustained? What other policy changes should be achievable and helpful? Should targets now be set to reduce external debt ratios or would it be appropriate simply to stabilise such ratios at somewhere around existing levels? Should there be any such targeting at all?
It is against this background that the May 1988 paper has been updated and revised. However, the basic approach of the earlier paper remains unaltered. In particular the debt issue is approached on the basis that the matter can only be properly assessed if the nature of debt is understood and if the reasons for the growth in debt are analysed in depth. A new appendix includes the basic statistics on both total and external debt, including the main sectors which owe the debt, and the debt servicing burden they face.
INTRODUCTION AND OVERVIEW
It is now widely accepted that Australia has a serious foreign debt problem and that, while the Government has made some policy changes to deal with the problem, more are needed. This paper argues that, in order to assess the extent of the problem, it is necessary to understand the nature of debt and why the debt problem has emerged. An attempt is made to do that. The conclusion is that quite radical policy changes are urgently needed.
What is the basis of the claim that there is a serious debt problem? One indication of the debt problem is that our external debt ratios have gone past the early warning points used by international private sector financial institutions to adjust their lending policies and are now in the danger area. What that means in practice is that foreigners have become increasingly reluctant to lend additional amounts to Australia and the risk of a "debt crisis", involving severe downwards pressure on the exchange rate and loss of business confidence, has been considerably enhanced. While such warning or danger points are necessarily arbitrary indicators, they reflect historical experience which suggests that, once a country's debt or debt-servicing level reaches a certain point, it becomes politically difficult to institute the policies needed to ensure the servicing. (1) The basic reason for this is that the present generation naturally resists attempts to make it pay for the non-productive use of past borrowings.
Of course, history does not necessarily repeat itself, and Australia can be said to have greater political stability, and therefore greater capacity than many others to persuade the community to make the necessary sacrifices or policy changes to service this debt. Moreover, in the end such changes and/or sacrifices have to be made. If the Government does not make the necessary policy changes to reduce spending and/or increase productivity, the financial markets will react in ways that result in a more sustainable relationship between spending and output. But the danger is that such reactions will occur in a crisis situation that results in a recession or even a depression. For example, as discussed later in this paper it is not sufficient simply to allow the exchange rate to depreciate: without accompanying changes in other policies that is likely to lead to a continuing depreciation that would lead Australia down the Latin American track of high inflation and associated political and economic stability. The issue is thus essentially about dealing with the debt situation in a timely and orderly manner.
Important to understanding the problem is that the increase in Australia's debt appears, in effect, largely to have gone to finance additional consumption and there has been no commensurate increase in productive assets needed to service the higher debt. Moreover, developments since the initial recognition of a debt problem in 1986 do not suggest a sustained capacity to respond in appropriate ways notwithstanding that the warning signals have been flashing red and clearly pointing to the need to reduce debt ratios not simply to stabilise them. In fact, while a reduction in debt ratios requires that the current account deficit be reduced below 2.5 per cent of GDP, (2) we have had only one year since 1979/80 in which the deficit has been below 4 per cent of GDP. The 1989/90 Budget forecast for the current account deficit suggests that it will again be around 5 per cent of GDP.
Debt ratios are also high and/or rising in a considerable number of overseas countries. That situation is not confined to developing countries but extends to major developed countries such as the United States. Of course, there may be a sound basis for a country having a period of growing debt ratios. Experience suggests, however, that a sustained faster growth in debt than GDP generally leads, sooner or later, to a correction involving a major slow down, recession or even depression. (As a 1988 World Bank report on debt of developing countries pointed out, a large group of such countries that allowed debt ratios to reach high levels have experienced falling per capita incomes in the 1980s.) (3) It is relevant that Australia has had large current account deficits in recent years notwithstanding the fact that overseas economic growth has been higher than could be expected to be sustained because, following the 1982 recession, major overseas countries have progressively been using up "spare" productive capacity. They have also recently undertaken substantial additional gross investment, which added to demand for our exports. Most forecasts thus assume that there will now be a period of slower growth overseas and, hence, slower growth in demand for our exports.
Our growing external debt thus leaves us highly geared, and increasingly exposed to the need to take sharp corrective action in unfavourable circumstances, whether that be recession or slow-down.
Australia has got into this situation because, for the past 15 years or so, we have been increasing our borrowings from all sources at a faster rate than our income and, for each of the three major sectors of the economy -- government, corporate and household -- the cost of servicing those borrowings has been taking an increasing proportion of receipts. These trends have worsened since the early 1980s.
The increase in total debt and debt servicing costs is almost entirely matched by the increase in foreign debt. However, too much should not be made of the increase in foreign debt per se: those who argue that external debt "matters" while internal debt does not matter -- "because we owe it to ourselves" -- overlook the key point that what matters most is how borrowings have been used. Internal debt can be just as much a real burden as external debt if the borrowings are not used productively.
Unfortunately, that is just what has happened. The increase in total borrowings has not been used to finance increased investment but has, rather, produced increased consumption. In fact, while gross business investment has increased strongly in the last two years, total gross fixed investment (private and public) has actually declined slightly relative to GDP as the public sector has cut back its capital expenditure. Further, a major proportion of the recent increase in gross business investment appears to have been for replacement of "worn out" or outdated capital rather than expanded productive capacity. The real growth in the capital stock has thus slowed since 1981-82 to 3 per cent per annum or less.
Consumption, Investment And Debt
Per Cent to GDP
Consumption (a) | Gross Investment (b) | Gross Total (c) | Debt External (d) | |||
| Av 1970/71 to 73/74 | 72.5 | (14.3) | 18.3 | 126 | 12 | (3) |
| Av 1974/75 to 77/78 | 76.3 | (17.5) | 17.2 | 113 | 9 | (5) |
| Av 1978/79 to 81/82 | 77.0 | (17.8) | 18.1 | 122 | 12 | (8) |
| Av 1982/83 to 85/86 | 79.1 | (18.8) | 17.8 | 143 | 29 | (22) |
| Av 1986/87 to 88/89 | 75.7 | (17.7) | 18.1 | 163 | 40 | (31) |
(a) Private plus government. Bracketed figures show public sector consumption.
(b) Excluding investment in dwellings (and real estate transfer expenses) and stocks. Includes private and public sector investment.
(c) Excluding all debt of financial institutions i.e. is understated to the extent of borrowings by financial institutions from overseas.
(d) Bracketed figures show net debt.
Australians cannot blame "overseas factors" for the rapid increase in debt in recent years. While the external economic environment was unfavourable for a period of about two years when the terms of trade fell from early 1985, it is the Government's responsibility to adopt policies to adjust to unfavourable changes in that environment. In any event, the recovery in our terms of trade from early 1987, and the failure to reduce the current account deficit to a sustainable level notwithstanding that recovery, suggests that the downturn in our terms of trade between early 1985 and late 1986 only brought forward the need to make the necessary policy adjustments. (We should also keep in mind that a tendency for commodity prices to fall relative to prices for other goods is not necessarily disadvantageous. It may simply reflect a relatively slower growth in the real unit cost of producing commodities: to that extent it would not represent any net disadvantage, in terms of profit per unit of output, to commodity producers generally.)
The situation has now been reached where debt levels and the servicing cost expose us to a high risk of a financial crisis, or a series of mini crises. Is it possible to view with equanimity the facts that the servicing of gross external debt now takes about 20 per cent of exports compared with 5 per cent in 1980-81 or that the servicing of total gross foreign liabilities (debt and equity) now takes over 30 per cent of exports, more than double what it was in 1980-81? But even if crises are avoided the increasing proportions of national income that go to servicing debt require sustained policies to hold down domestic spending. This, in turn, inhibits both investment and growth in living standards. The problem has arisen because of the failure to constrain spending sufficiently in circumstances where the growth in national income and in Australia's capital stock has slowed. Adjustments are needed -- and needed quickly -- to restore a better balance between spending and income and to reduce debt ratios.
Some recent academic comment (4) has, however, pointed out that, with the public sector now likely to run a "budget" surplus, any net overseas borrowing from hereon will necessarily be undertaken by the private sector. In these circumstances, it is argued, the Government should not worry if the private sector continues to be a net borrower and should not adopt a lower current account deficit as a specific policy target. Borrowing decisions of the private sector will reflect its judgements about investment opportunities or about the timing of consumption spending, and it will have to take the actions needed to service the debt. Those who argue to the contrary, it is suggested, have to show that there is a "market failure" that is causing the private sector to over-borrow.
There is much to be said for minimising government intervention in the economy. However, whatever happens to private borrowing from hereon, the debt that has been accumulated prior to the public sector ceasing to be a net borrower has to be serviced regardless of whether it is public or private. As the Reserve Bank has said "The extent to which resources must be diverted to its future servicing is the same whether the debt is publicly or privately owned, and the investment which it has enabled will not automatically ensure that these resources are available". (4) In fact, as already noted, the increase in external debt does not appear to have been accompanied by a comparable increase in productive assets that could be used to service that debt.
Beyond that, the fact that the public sector has ceased to be a net borrower does not automatically mean that excessive borrowing will cease. Private sector savings and investment behaviour may be distorted by other government policies. For example, private borrowing may become excessive if monetary policy is inappropriate (as this paper argues it has been) or if tax policy unduly favours debt finance, or if the extension of social security discourages saving, or if some combination of such factors exists. In any event, it is not necessary to have the current account deficit as a policy target in order to justify the maintenance of a firmer monetary (or fiscal) policy than for most of the period since the early 1980s.
It is little realised that, over the past five years, the growth in credit extended to the private sector has exceeded 20 per cent per annum, more than 5 percentage points per annum higher than in the previous five years. Equally, little attention has been given to the fact that some $44 billion of the increase in external debt of $122 billion between June 1981 and June 1989 was incurred by financial institutions. Pretty clearly, a fair proportion of that has been reflected in higher consumption either directly or indirectly as a result of the increase in prices of assets whose purchase has been effected by increased borrowing. It is surely difficult to deny that, if monetary policy were now to be directed to a progressive reduction in inflation, that would do much to increase saving and to reduce the current account deficit and external debt ratios.
It would thus seem unwise to assume that the end of history has been reached and that there will be no repetition of the many examples of excessive borrowing by nations. Further, the higher become the debt ratios the greater the difficulties which the Government may face, short of a crisis, in pursuing appropriate policies to deal with the situation. There is already considerable resistance to the record high real interest rates Australians are having to pay in order to persuade foreigners to continue to finance high current account deficits, as reflected in the marked widening in the differential between domestic interest rates and interest rates in major financial markets overseas -- but without any widening in the inflation differentials. However, any major easing in monetary policy runs the risk of a foreign exchange crisis.
The Government should set a three year program to reduce Australia's external debt/debt servicing ratios at least back to the early warning levels used by international private sector lending institutions. Such a program should focus on policy changes to improve productivity but should include continued restraint on demand.
HOW DEBT SHOULD BE ASSESSED
THE NATURE OF DEBT
In 1958 Professor James Buchanan set out the basic principles by which debt should be analyzed. (6) He pointed out the fallacy in the commonly accepted notion that the economic burden of debt occurs at the time of a loan and is represented by the lender "transferring resources" to the borrower at that time. Buchanan argued that, as the act of borrowing and lending is a voluntary one, both sides receive a present benefit, the borrower getting funds now and the lender getting a promise to a future stream of income. Lenders and borrowers undertake the transaction in their own perceived self-interest, both expecting to gain from it. This voluntary nature of the process of incurring debt is a central characteristic that is often implicitly overlooked in analysis of the burden of debt. However, once that voluntary nature is accepted, it will be understood that all debt constitutes a burden on the future generation in the sense that that generation has to find the resources to service it.
The importance of this is that, if the burden is on the future generation, it becomes very important how the funds are used. If the borrowings are not used for productive purposes the future generation is likely to resist the lowering of its living standards needed to service the debt. Therein lies the seeds of debt crises.
Of course, for the private borrower the use of borrowings is in one sense his own decision and he has to accept the subsequent net income consequences either for his net income or for his effort to earn income if he "splurges" on consumption rather than invests. But, if government policies inappropriately encourage a sufficient number of individuals to over-spend there will then be adverse implications for the economy as a whole and future generations will resist the policies needed to correct the earlier mistakes. For the public borrower it will be the future taxpayer that has to bear the burden and he has to bear the consequences even though he may not have participated in the original decision, or only remotely. (That fact led Buchanan to the view that, because of the obvious potential and incentive for politicians to engage in public borrowing to excess, the public sector should only borrow for "lumpy" capital investment projects or when there are "extraordinary" demands on revenues, such as in war. Analyses such as these have provided the rationale for the moves in America for a constitutional amendment to strictly limit borrowing by the Federal Government and to extend the constitutional limits which already apply to government borrowing in a large number of American States.)
Adherents of rational expectations theory may argue that the burden of public debt need not be on future generations if the present generation anticipates the higher taxes needed in the future to service the debt and, as a result, increases its (private) saving to offset the decline in public saving. However, while this possibility cannot be ruled out, and while there have been instances where a big increase in the budget deficit has been followed by an increase in the household savings ratio, the general downward trend in the savings propensity of the private sector since the early 1970's, at a time of considerably higher public sector borrowing, does not support the theory.
Another conclusion from Buchanan's analysis is that, if the burden of all debt is on future generations, that must include the burden of external debt. Of course, foreign exchange earnings have to be set aside to meet the cost of servicing. But that does not in itself necessarily impose any additional net burden. As with internal borrowing, it all depends on whether the external borrowings have been productively employed. (7)
The additional problem that can arise with a large external debt is that, if the borrowings have not been productively employed, there is the potential for a national debt crisis to be induced as foreign lenders become increasingly reluctant to lend further amounts to a country. This is particularly important for a country that is normally a net importer of capital, as Australia has been.
The key point from Buchanan is that it confirms the common sense conclusion that everybody knows at an individual or family level -- that is, that there can be "over-borrowing" in the sense of imposing a burden on future generations that will not have the productive capacity to service it and that will have to lower living standards to do so.
But it is one thing to accept that as a theoretical proposition and quite another to judge whether and when a stage of over-borrowing has been reached.
WHAT ARE THE LIMITS TO DEBT?
Some question the existence of a debt problem by pointing out that total Australian debt is still below early post war levels and that numerous other countries have higher total debt/GDP ratios or higher external debt/GDP ratios -- or both -- than Australia. Moreover, notwithstanding two reductions in Australia's international credit rating, overseas lenders are unlikely to stop offering further foreign currency loans or even to stop buying $A denominated securities. (8) Indeed, the wide range of credit ratings by international agencies implies that, at a price, markets will accept continuously deteriorating debt ratios, thus creating a situation where at some point a slight change in circumstances can push a country over the edge into crisis. But by indicating an objective of reducing the current account deficit and stabilizing the external debt/GDP ratio the Government has recognised that there is a point beyond which it would be imprudent to continue borrowing overseas. What, then, determines the appropriate limit to debt, either in total or external?
The reality is that there is no clear cut answer to this question and there is no single measuring rod by which we can say that debt has reached an "excessive" level. Whether a country has "excessive" debt levels is partly a matter of judgment based on an assessment of trends and of policies in place, and partly on the economic and political circumstances. But there are rules of thumb used by international private sector financial institutions which provide warning points for lending policies of those institutions and which ought similarly to provide warning points for governments. Moreover, it is possible to identify situations which a country should clearly avoid getting into.
At one extreme, a situation to be clearly avoided would be when a country is no longer able to borrow externally even in foreign currency denominated loans or is only able to do so at prohibitively high interest rates. This is the situation of many Latin American and African countries. A similar situation could arise with domestic borrowings by a government. At such points, potential lenders would be saying that there was a very high risk either of default or (in the case of domestic debt) of monetizing the debt through inflating the currency. At present there is a considerable number of countries effectively unable to borrow overseas but, while Australia has faced that situation in the past, it seems some way distant from it now.
A less extreme -- but still highly undesirable -- situation would be if debt levels reach the point where foreign investors are demanding increasing yields on their loans and/or "insurance" in the form of a lower exchange rate before investing in $A denominated securities and where the resultant pressures on interest and/or exchange rates are adversely affecting the performance of the domestic economy or threatening to do so. There there can be little doubt, for example, that that point was reached around mid 1986 when, on more than one occasion, the $A went into a brief downward spiral and threatened to go further down. Had that occurred, the flow-through effects in terms of increased inflation/interest rates would have had the potential to seriously affect economic performance and (in particular) domestic investment. As it was, the sharp tightening of monetary policy which then eventuated in a series of steps -- and which was necessary to substantially restore the preparedness of foreigners to continue to finance the current account deficit -- apparently required only a temporary upward "blip" in interest rates and a short term squeeze on domestic spending. (9)
However, that "escape" was relatively short-lived and was primarily due to the unexpectedly large recovery in Australia's terms of trade. The progressive re-tightening of monetary policy from early 1988, and the consequent rise in real interest rates to record or near record levels, was a direct consequence of the foreign debt problem. By mid 1989 the Treasurer was indicating that there would be a need for domestic spending to grow at a slower rate than national output for several years -- confirmation that debt had reached excessive levels.
This situation should never have arisen. Measures should have been taken early enough to have prevented the emergence of an excess debt problem by the pursuit of policies to increase production and income and, at the same time, to restrain demand. But that pre-supposes a recognition and understanding of the potential for a debt problem to arise and the existence of early warning signals that might be used as a basis for changing policies.
POSSIBLE DEBT REDUCTION TARGETS
The question arises, therefore, as to whether appropriate early warning signals exist and, if so, whether they might now provide a guide to the setting of possible targets for the reduction of Australia's external debt.
The following points seem relevant:-
(i) Total Debt/GDP and Total Debt Servicing/GDP Ratios.
While debt/GDP ratios are the most commonly used in discussion of the debt issue, there is no commonly accepted total debt (i.e. domestic plus external) ratio that can be regarded as indicating that a danger point has been reached. In fact, given that much depends on how debt has been used, analysis based on such ratios is of limited use. However, rapid increases in such ratios could be one warning of a debt problem. Similarly, a rapid increase in the ratio of public sector debt to GDP could provide an early warning.
(ii) Use of Debt
If debt servicing/GDP ratios are rising while the proportion of investment from total spending/income is falling, or not rising commensurately, then that provides a prima facie case for arguing that growing debt servicing may be on a collision course with a falling capacity for future income growth. Similarly, a faster increase in debt than in capital stock could be an indicator of potential problems. However, even if an increase in debt is matched by an increase in investment, that does not rule out the potential for a problem if the investment has not been directed to productive purposes.
It is particularly important to examine the use of debt when making either international or historical comparisons. The fact that debt/GDP ratios are lower now than they were at some earlier period, or lower than in some other country, does not necessarily indicate the absence of a debt problem. More productive use may have been made of our earlier borrowings and, similarly, other countries may have made more productive use of their borrowings. Some countries have traditionally used a greater proportion of debt to finance business.
(iii) External Debt
As with total debt, analyses of external debt based on debt/GDP ratios seem of limited usefulness. The key litmus test for external debt must be the extent to which increases in debt are affecting the current account of the balance of payments and, in particular, exports of goods and services. A country that is increasing its external borrowings but does not, in due course, produce a commensurate increase in exports is clearly headed for trouble. Australia's own historical experience suggests that, once gross property income payable overseas (i.e. interest on overseas debt plus income payable on foreign equity investment) reaches about 25 per cent of total current receipts from overseas, there is a high risk that a recession/depression will ensue, as occurred in the 1890s and 1930s. More generally, private sector financial institutions involved in international lending have developed early warning signals based on past experience that has indicated that, once certain ratios are reached, there is an increasing risk of countries being forced to reschedule and/or of experiencing currency instability and a deterioration in economic performance. These warning points/trends, which are set out in Table 10, typically include:
- when gross external debt reaches 160 per cent of exports of goods and services, with 200 per cent being regarded as a major danger point;
- when the servicing (i.e. interest) cost of gross debt reaches 15 per cent of exports of goods and services, with 20 per cent being regarded as a major danger point;
- when the current account deficit reaches 20 per cent of exports of goods and services, with 30 per cent being regarded as a major danger point.
GRAPH 1
PROPERTY INCOME PAYABLE OVERSEAS
(% Current A/C Credits)
Butlin (1962), McLean (1968) & ABS 5301.0, 5302.0 & 5303.0 (various)
Calendar years until 1913, then fiscal.
It would be wrong to base policy on the assumption that previous historical experience will be repeated, or that warning signals which are partly based on the experience of less politically stable countries are necessarily relevant to Australia. Further, there is clearly a major element of subjective judgement in using any particular ratio or ratios as a basis for policy. However, while these (and other) ratios do not therefore provide any hard and fast rules signalling the need to change policies, they can serve as an important guide. Trends in such ratios for Australia are contained in the attached tables and are discussed further below.
GROSS OR NET?
There is some debate about whether the best means of assessing levels and trends in debt is to look at gross debt and the servicing cost thereof, or to have regard to some concept of net debt and the net servicing cost i.e. to take account of assets, and the income earned thereon, that represent an offset to the gross debt. For example, assets that have been acquired through investment in overseas countries by Australian companies might be regarded as an offset to overseas borrowings by those companies: indeed in many cases those assets have been financed by overseas borrowings. Thus, a type of balance sheet can be drawn up showing all Australia's external assets and liabilities.
Australia's External Balance Sheet, June 1989
$ Billion
| Assets | |
| PUBLIC SECTOR Official Reserve Assets PRIVATE SECTOR Loans to Foreigners Equity Investment Overseas (by Australians) Other Investment Overseas TOTAL | 21.3 7.5 42.9 8.5 58.9 80.2 |
| Liabilities | |
| PUBLIC SECTOR Official Debt Public Enterprise Debt
PRIVATE SECTOR Financial Enterprise Debt Trading Enterprise Debt Equity Investment in Aust (by Foreigners) Other Investment In Aust TOTAL | 33.7 16.2 11.9 61.8 29.5 45.7 69.7 14.6 159.5 221.3 |
But this is far from telling the whole story. In particular, some overseas borrowings will have been used to acquire or build assets in Australia. Indeed, in one sense all assets in Australia can be regarded as potentially available to meet the deficiency shown in the above table between assets and liabilities. Accordingly, if all assets, both financial and real, were offset against gross external liabilities, they would exceed it -- as a country there is clearly at any one time a large amount of assets that can potentially be drawn upon to reduce external debt.
Interpreted in this way, an external debt problem could not arise. But the basic notion that a national debt problem can arise does not derive from any idea that outstanding external debt may exceed all assets available to meet that debt: few would envisage that debt should be reduced by selling off assets. It derives, rather, from the possibility that the cost of servicing outstanding external debt may become so large, relative to total foreign earnings, that there will be a refusal to accept the reduction in living standards (or increased effort) needed to meet the servicing i.e. the key question is whether the overseas borrowing has been productively employed. This suggests, therefore, that the primary concentration should be on looking at trends in gross external debt and whether the cost of servicing that debt is keeping pace with total foreign earnings.
At the same time, there is logic in taking account of liquid financial assets such as official holdings of financial securities issued by overseas governments and fixed interest loans by Australian financial institutions to non-residents. For example, an increase in a country's international reserves of gold and foreign currencies can be seen as providing an offset to an increase in overseas debt. Equally, a country which has financial institutions engaged in extensive international financial intermediation may experience a large increase in gross debt that is wholly or substantially offset by international loans at interest.
Thus, there is logic in the concept of net debt which is used in the Australian context and which offsets against gross debt holdings by Australian official institutions of overseas countries' financial securities and fixed interest loans by Australian private institutions to non-residents. At the same time it needs to be noted that fixed interest loans to residents of overseas countries are subject to default, or to re-scheduling, in the event of a world-wide recession or depression.
In Australia's case it seems appropriate to have regard to trends in both gross and net debt as defined in this way. However, for purposes of considering warning and danger signals, and considering targets, this paper focuses primarily on trends in gross debt and in the servicing cost of that debt relative to total foreign earnings.
AUSTRALIA'S DEBT SITUATION ASSESSED
The attached series of tables shows trends in the relationship between debt/debt servicing and a number of other variables, as well as trends in other relevant economic indicators. The following summarises the major points.
THE STOCK OF DEBT
One clear conclusion emerges from the various measures of debt stock, namely that total debt has been rising faster than GDP since about 1975/76 and that process has speeded up since the early 1980s (Table 1). The speeding up mainly reflects increases in private rather than public sector debt, although total State sector debt has grown faster than private sector debt (Table 2). The faster-than-GDP trend in total debt since the mid 1970s would probably have emerged earlier if the high inflation around the mid 1970s had not raised the growth of nominal GDP relative to the then existing debt stock, i.e. if lenders had not suffered a real loss on their investments.
Although accurate, comprehensive figures are not available for corporate sector debt, an important component of the more rapid rise in private sector debt/GDP ratios appears to have been the relatively greater resort to debt, as opposed to other forms of finance, by the business sector. A partial analysis by the Reserve Bank suggests, indeed, that there has been a very large rise in corporate debt to equity ratios. (10) Increases in corporate debt servicing ratios (11) also imply that, while fluctuating, the gearing of the business sector has trended upwards (see Table 6) (part of the increase in corporate debt servicing ratios would, however, reflect higher interest rates rather than higher debt per se). Overall, it is difficult to avoid the conclusion that the exposure of the business sector to a downturn or slow down in national income has increased substantially. (12) Investment may also be inhibited by this increased exposure.
It needs also to be recognised that the increase in the private sector debt/GDP ratio cannot be viewed in isolation but has to be assessed against the background of the growth in total (including external) debt GDP ratios, i.e. if the country as a whole is accumulating excessive debt, an increase in borrowings by the business sector which may be justifiable in terms of the relative costs of raising capital for individual companies may nonetheless pose difficulties for that sector if excessive national debt forces governments to restrain national spending and, hence, company earnings.
It is pertinent, therefore, that there has been a dramatic increase in external debt. The increase has been concentrated in the period since 1980-81, with total gross external debt increasing from about 11 per cent of GDP at June 1981 to 41 per cent at June 1989. This has more or less matched the increase in total debt over the same period from 120 per cent to 167 per cent of GDP (Table 1). Both public and private sectors have shared responsibility for the increased external debt (Table 4). While the increased public sector external debt does not reflect an increase in foreign currency borrowings by the Commonwealth Government itself, there has been a major increase in the total of foreign currency and $A denominated debt owed to foreigners by both the Commonwealth Government and by government authorities. Thus, of total gross external debt of about $129 billion at end June 1989, some 45 per cent represented public sector debt, the same proportion as at 30 June 1981.
A major component of the increase in the external debt of both public and private sectors has been the surge in overseas borrowing by financial enterprises, which has risen from under $2 billion in the early 1980's to nearly $46 billion at June 1989. This increase, which largely reflects the removal of exchange controls on overseas borrowing by financial institutions, has not been matched by any significant increase in overseas lending by such institutions -- with the result that the rise in net debt of financial institutions has also been very large (Table 5). It is especially noteworthy that public sector financial institutions have played a major role in this process. While external borrowings by trading enterprises (public and private) have also increased strongly, their share of net debt has dropped sharply since the early 1980's because of the much greater involvement of financial institutions (Table 5).
Although comprehensive data is not available, the maturity of external debt has shortened considerably in recent years. (13) At the same time, there has been a significant diminution of exposure to exchange rate changes, with the proportion of externally held debt denominated in $A increasing from 13 per cent at 30 June 1981 to almost 40 per cent at 30 March 1989 (Table 6). One effect of that diminution has been to put upwards pressure on domestic interest rates.
While it is very difficult to obtain comparable figures for the external debt of other countries, Australia is not yet in the group of countries whose debt levels have forced them to experience long periods of relative economic stagnation. At the same time Australia it is clearly well down the debt crisis path and the fact that we are some way off Third World country debt levels does not mean that there is not cause for concern. New Zealand's experience is pertinent. In terms of some of the early warning signals used by international banks it is clear that amber lights (gross external debt reaching 160 per cent of exports) would have started to flash in 1984 and that red lights (gross external debt reaching 200 per cent, and the current account deficit exceeding 30 per cent, of exports of goods and services) have been showing since 1985 (see Table 10). Further, although private sector debt comprises a higher proportion of Australia's total than for many other countries -- and is therefore more likely to be represented by income earning assets or assets which can be made to earn income -- the servicing of that debt is importantly dependent on the pursuit of appropriate economic policies and the creation of an environment conducive to adjustments needed to reduce costs and increase productivity. As noted, it becomes increasingly difficult, short of a crisis, for Government to sustain such policies once the level of debt passes a certain point.
Another way of looking at the emergence of the external debt problem is to examine trends in Australia's gearing ratio i.e. the proportion of foreign debt to foreign equity. Table 7 shows that, in net terms, there has been a very large increase, with net debt now being over three times higher than net equity compared with only one third as high in the early 1980's. On the other hand, total net external liabilities have not risen nearly as rapidly as net debt, reflecting the fact that the increase in Australian equity investment overseas has not been much less than the increase in foreign equity investment in Australia.
DEBT SERVICING RATIOS
The best guide to potential and actual debt problems can probably be obtained by looking at trends in debt servicing ratios, which will reflect changes in the real cost, as well as the amount, of borrowing. Further, with the increase in short term and floating rate borrowing in recent years, servicing ratios are likely to give a comparatively up to date picture of the burden of interest.
It is apparent from Table 8 that there has been a consistent pattern of increasing servicing costs relative to various measures of income in each of the main sectors -- Government, Household and Corporate. There has been a marked increase since the early 1980s, particularly for the non-financial part of the corporate sector where net interest payments have increased from around 33 per cent of companies' net operating surplus in the mid-1970s to over 50 per cent. Financial enterprises' margins also appear to have been significantly squeezed by a faster growth in interest payments, relative to total receipts, since the early 1980s, presumably reflecting the effects of financial deregulation.
For households, the proportion of income going on debt servicing has also increased quite sharply and interest on both consumer and dwelling debt have contributed to this. Personal bankruptcies (including individuals owning unincorporated businesses) have been growing as have the number of mortgage payments in arrears.
The increase in the external debt servicing ratios has, however, been the most marked (Table 9). Interest payments on gross external debt -- one of the criteria adopted by the international banks -- passed the 15 per cent of exports warning point in 1985 and reached danger point in 1987. By 1988-89 it was almost 20 per cent of exports. Further, while total investment income payable overseas has increased less rapidly than interest payable overseas, in 1988-89 it accounted for over 30 per cent or exports, more than double what it was as recently as 1982/83.
USE OF DEBT
One way of looking at the external debt problem is to compare the gap between national spending and income. (14) Table 11 shows that that gap widened sharply in the early 1980's and has since remained large. However, this tells us nothing about where the excess spending has gone.
Drawing on the table in the introductory section, it is clear that the increase in external borrowings has produced increased consumer rather than increased investment (15) (see also Table 10). Between the early 1970s and the mid 1980s total consumption spending increased from 72 per cent to around 79 per cent of GDP while total gross fixed investment (excluding investment in dwellings) scarcely changed. While consumption peaked in 1982/83 and has declined steadily since then, it remains considerably above early 1970's levels. Total debt has increased from 123 to over 160 per cent of GDP since the early 1970's, largely reflecting the comparable increase in gross external debt from around 10 to around 40 per cent of GDP.
The increase in consumption is almost entirely a reflection of increased government "consumption" expenditure. Of course, the distinction between consumption and investment is, to an extent, an artificial one: some public "consumption" e.g. on education and health, has a significant investment element. Nonetheless, there can be little doubt that the increased government consumption expenditure, and the associated increase in social security transfer payments, has discouraged saving and work by individuals. Although debate has generally revolved around the net disincentive effects of the higher taxation needed to finance the additional expenditure, it would be more accurate to say that it is the interaction of the combined effects of higher taxation and increased social security expenditure that has left less incentive to provide for the future and a reduced capacity to make such provisions. Further, part of the increase in government spending since the early 1970s has, until quite recently, been financed by increased public sector borrowing (see Table 3). Quite apart from the resultant direct increase in debt, this has had a separate additional effect in widening the gap between spending and income because additional government borrowing does not necessarily reduce private sector spending whereas additional taxation does tend to do so.
The reduction in public sector borrowing and outlays since 1986-87 has resulted in a sharp reduction in government consumption (Table 12). This is an important step to reducing the external debt problem, although such spending remains considerably above early 1970's levels.
The reduction in public sector borrowings and outlays has also been accompanied by a surge in business investment. However, it is relevant that, of the gross investment in fixed capital that has been occurring, an increasing proportion has clearly been replacement investment rather than additions to the capital stock. Table 14 shows that the proportion of gross investment represented by consumption of fixed capital has increased from around 50 per cent in the early 1970s to around 65 per cent. In fact, the growth in the real capital stock has slowed to 3 per cent per annum or less since 1981-82. The failure of investment to grow relative to GDP has been accompanied by considerably higher levels of unemployment in the 1980's than in earlier decades, implying that the capital stock has grown insufficiently to allow increases in the potential work force to be employed. Thus, while unemployment has fallen to around 6 per cent by mid 1989, compared with the peak of over 10 per cent in 1983, it remained at (for the post World War II era) historically high levels.
It is apparent, indeed, that there has been insufficient incentive to invest. The very large increase in wages in the mid 1970s sharply reduced the profitability (or expected rate of return) of business investment and, while there has been a recovery since the mid 1980's, as the Business Council submission on the 1989-90 Budget pointed out, up to 1986/87 profitability remained below the levels of the early 1970's. (16) Since 1986/87 there has probably been a further improvement in profitability.
An important question, however, is whether the increase in business investment has been going into the traded goods sectors, which can scarcely have been encouraged by wage costs that have increased at rates that have consistently undermined Australia's international competitive position. In fact, while the industry break-down of private new capital expenditure is not necessarily accurate, a substantial proportion of the increase since 1986-87 appears to have gone into the "finance" sector (finance, insurance, real estate and business services).
WHY HAS A DEBT PROBLEM EMERGED?
OVERVIEW
In considering what to do about Australia's excess debt problem it is important to understand why there has been over-borrowing and why that has continued. Why haven't corrective forces, either natural or government, operated sooner? If we think of a pair of scissors with two blades -- a spending blade and an income blade -- why has the growth in income tended to remain significantly slower than the growth in spending? (see Table 11).
Government spokesmen initially attributed almost the whole debt problem to what they described as the "shock" administered by the 15 per cent fall in Australia's terms of trade from the first quarter of 1985 to the last quarter of 1986. Calculations were even made purporting to show what the current account deficit would have been if there had been no change in the terms of trade from early in 1985 (17) and in September 1986 the Treasurer claimed that Moody's initial downgrading of Australia's credit rating "essentially reflected a judgement about what is seen as a continuing severe impact on Australia's external account of current depressed commodity prices for products of particular importance to Australia". (18)
However, such claims have subsequently been shown to be unjustified in view of the fact that the current account deficit has continued to run at very high levels notwithstanding the recovery in the terms of trade to the point where, by the March quarter of 1989, they had reached their highest level since late 1976 and were over 25 per cent higher than at the time that the Treasurer uttered his "Banana Republic" warning in May 1986.
In reality, both total and external debt ratios were increasing well before early 1985 and, as the Industries Assistance Commission noted in 1986/87 "although the terms of trade decline has added to pressures on the current account, the trend toward larger current account deficits originated in the mid 1970s ... and have generally been the result of rising import demand (rather than poorer export performance) as well as substantial growth in the servicing of foreign debt." (19) The relatively brief fall in the terms of trade in 1985-1986 cannot thus be regarded as a significant cause of our problems but was more in the nature of bringing forward the need to recognise that inappropriate policies had been pursued.
GRAPH 2
TERMS OF TRADE
(1984/85 • 100)
ABS 5206.0 & 5207.0 (various)
Essentially, the excess debt problem reflects a failure by governments and other opinion leaders in the community to recognise the potentially damaging longer run effects on the economy of a whole range of economic and social policies, pursued with varying degrees of intensity, since the early 1970s. This has resulted in an excessive growth in national spending relative to national income because economic policy -- both at the macro-economic and micro-economic levels -- has failed to adequately restrain spending and/or to encourage production and income, especially in the traded goods sector. Directly or indirectly, governments -- especially Federal Governments -- must shoulder the lion's share of the responsibility for our debt problem. (20)
Should External Borrowing have been Controlled or be Controlled Now?
Before considering the policy changes required it is necessary to address two frequently adduced, if somewhat conflicting, arguments, viz, that, as the increase in external debt since 1981 is importantly due to private sector borrowing overseas, it is the business sector that must shoulder a substantial share of the responsibility for the excess debt problem (a variant of this argument is that large overseas borrowings to finance take-overs have been stimulated by the tax deductibility of interest, which should be discontinued); or, that the overseas debt problem would not be so great if governments and their authorities had been prevented from borrowing in overseas capital markets.
As already noted, the increase in external debt between 30 June 1981 and 30 June 1989 was shared almost equally between the public and private sectors, with the latter owing about 55 per cent at each period. Second, about one third of outstanding external debt is owed by financial institutions (public and private sector) and, while a substantial proportion of that would have been on-loaned to business, some may have been loaned to individuals rather than businesses.
The key point, however, is that it is not the act of overseas borrowing per se that has been the underlying cause of the excess of spending on imports over exports. Rather, it is the various economic policies that have been pursued by governments that have caused or allowed that excess of spending which has, in turn, led businesses and financial institutions to increase their borrowings from overseas. (21) If, for example, governments and/or their authorities had not borrowed overseas, but their total borrowings had been unaltered, then in the absence of other policy changes either private sector residents would have raised more loans from overseas (because they would have been "crowded out" of the domestic capital market), or overseas residents would have invested more in $A securities issued in Australia by governments and/or their authorities i.e. the amount of debt owing to foreigners would not have been significantly different.
It follows that the increased borrowing in overseas capital markets by the Commonwealth Government or by public trading enterprises is not an underlying cause of the increase in overseas debt. Rather, it is the increase in total borrowings, both domestic and overseas. The main reason for retaining limits on borrowings in overseas capital markets by public trading enterprises is thus to get a "perceptions" effect i.e. to give the impression that action is being taken to bring the debt problem under control. The reality is that the key policy action in that regard is the move to make the public sector a net saver.
As to the possibility of controlling/limiting borrowings in overseas capital markets by the private sector, the greatly increased sophistication of international capital markets would make such action very difficult, if not totally impracticable, to police. Moreover, it would be a bureaucratic nightmare to decide which overseas borrowings should be approved and which should not. The limiting of overseas borrowings by the private sector is best achieved through other, more market-oriented policies.
We turn now to consider the government policies that have caused Australia's excess debt problem.
Increased Government Spending
Between the early 1970s and the mid 1980's the relative share of national resources taken by government increased by over one-third from about 31 per cent to 43 per cent of GDP. While it has since dropped back to about 37 per cent, this increase not only added to aggregate demand/spending but did so in ways that have discouraged saving and work by individuals. The OECD report published in 1987 on "Structural Adjustment and Economic Performance" concluded that the growth of public spending has operated, at the margin, to reduce national income of OECD countries by 10 to 15 cents for every extra $1 raised in taxes. Some academic studies suggest that, by reducing the supply of labour, the effects of high taxation alone are considerably greater. (22) In fact, the OECD report suggests that it is the interaction of the combined effects of higher taxation and increased welfare expenditure that is relevant. This combined effect has left less incentive to provide for the future because "Big Brother" will not only provide for retirement but will provide "goodies" on the way there. Moreover, quite apart from any possible disincentive effects on saving, the increase in taxation needed to fund the increase in welfare expenditure has reduced the private sector's capacity to save.
Since the early 1970s, Commonwealth spending on social security alone has in fact about doubled from 4 per cent to 8 per cent of GDP, as has the proportion of households relying on direct benefits as their principal source of income. Over one in four households is now in that position, and pensioners and beneficiaries are now equal to more than 40 per cent of those employed compared with less than one third in the early 1970s. Indirect benefits provided by government through education, health and housing services have also grown as a proportion of disposable income. Table 12 shows that public consumption expenditure has, until recently, accounted for an increasing proportion of total national spending while gross business investment has been a relatively stable proportion, at least prior to the surge of the last two years.
But the expanded Welfare State may not only have reduced the incentive to save and work. It has probably also encouraged additional spending financed from borrowing. People have felt it appropriate to "gear up" to a much greater degree than hitherto because the State is providing so many income supports. In addition, the tradition of leaving assets to the next generation has been discouraged. Indeed, some financial institutions have sought to achieve the ultimate in gearing by persuading elderly couples to take out the maximum mortgage on their houses so that they can maximise consumption and leave the minimum net assets to the next generation.
Increased Government Borrowing
In the 25 years to the mid 1970s, annual net public sector borrowings (PSBR) averaged about 2.5 per cent of GDP and, in the five years to 1973/74, the average was 1.4 per cent per annum. From 1974/75 to 1987/88 the average was 4.2 per cent per annum and in no year prior to 1987/88 was the PSBR less than 3 per cent of GDP (Table 3) i.e. part of the increase in government spending that occurred from the mid 1970's was financed by governments avoiding the hard decisions to increase taxes/charges or to improve the efficiency of public authorities. As additional government borrowing does not necessarily reduce private sector spending whereas additional taxation does tend to do so, if the additional government spending had all been financed by raising additional taxes then national spending would have been less excessive than it has been. Further, in the circumstances where government was assuming increased responsibility for the future needs of individuals, the public sector probably ought to have become a net saver (23) (where an increase in government has the effect of reducing the incentive and the capacity to save of the private sector, the government ought to make up the savings that would have been undertaken by individuals if increased social security spending/increased taxation had not reduced individuals' perceived need/capacities to do so).
The sharp jump in the PSBR between 1982/83 and 1986/87 warrants particular mention in this context. In 1982/83 the then Liberal Government, faced with a mild recession and an imminent election, cut income taxes, increased spending, and allowed increased borrowing by public authorities. The resultant blow-out in the PSBR was allowed to increase even further in 1983/84 by the incoming Labor Government. That Government then proceeded for the next two years (i.e. 1984/85 and 1985/86) to maintain a very high spending and deficit policy on the basis that the wages accord with the union movement would allow Australia to step up its rate of economic growth without experiencing the wages "outbreaks" that had occurred on previous occasions of rapid growth in domestic spending.
While the resultant stimulus to domestic spending did not in fact result in a major wages surge, wages growth continued well above that for our major international competitors at a time when the level of unemployment ought to have allowed the gap to be closed. (24) The overseas current account deficit increased from an already high 4 per cent of GDP in 1982/83 to over 6 per cent in 1985/86 (Table 3). From early 1985 to late 1986 that led, in turn, to a progressive depreciation in the $A, increasing the $A liability of foreign currency debt. Thus, this continued expansionary fiscal policy up to 1986/87 contributed to the increase in our overseas debt by maintaining an excessive rate of national spending and inflation.
Of course, the excessive growth in national spending could have been prevented if a "tighter" monetary policy has been operated. This is considered further below. However, the approach adopted by governments since 1981/82 in particular has failed to recognise that, with monetary policy unchanged, an expansion in the PSBR does not, at least in the short run, lead to an equivalent reduction in private sector borrowing or, more accurately, an equivalent increase in net saving by the private sector, i.e. there is, in consequence, an increased national draw on overseas savings. Thus, the increase in the PSBR from 1981/82 to 1986/87 was broadly mirrored in sustained higher current account deficits, identified as the so-called "twin deficits" problem, and the massive expansion in overseas debt. In two years alone (1984-85 and 1985-86) overseas debt increased by no less than $48 billion, of which only about $16 billion was due to the depreciation of the exchange rate.
The fact that the subsequent reduction in the PSBR and the movement to a public sector surplus did not lead to an immediate reduction in the current account deficit does not deny the link between changes in public sector borrowings and the current account deficit: but it shows that there is also a need for other policies, particularly monetary policy, to limit the growth of private sector demand and to contain inflation.
WAGES/INDUSTRIAL RELATIONS POLICIES
Wage levels in Australia have been determined within the context of a centralised determination system that makes awards with the force of law and, notwithstanding widespread and increasing public concern at the extent of union power, that has given existing unions a considerable capacity to exercise monopoly power. Further, the use of quasi-judicial processes to set terms and conditions of employment has meant that social objectives have played a not inconsiderable role in setting those terms and conditions. The net result has been that Australia's nominal unit labour costs (and inflation) have consistently increased significantly faster than those in our major trading partners and, notwithstanding the fall in real wages since 1982/83, this has continued to occur since then. This has required continuing downward adjustments in the exchange rate.
GRAPH 3
RELATIVE UNIT LABOUR COSTS
(Non-Farm Sector, 1984/85 • 100)
Commonwealth Treasury
The excessive growth in wage costs has mainly reflected the system itself and the monopoly power it gives to trade unions; but some governments have not helped with the policy attitudes taken towards the appropriate rate of wage increase. The central arbitral authority, now called the Industrial Relations Commission, has adopted a compromise approach to the prevention and settlement of industrial disputes and has paid inadequate regard to the economic implications. In circumstances where unemployment levels were relatively low, and the unions' bargaining position relatively strong, that was, perhaps, predictable in the context of a system that gives considerable weight to the resolution of disputes as distinct from the appropriate economic outcome. However, the rise in unemployment to around 10 per cent after the 1981/82 wages upsurge ought to have presented the Commission with an appropriate opportunity to achieve a slower growth in wages. It is apparent that the accord reached between the present Government and the unions, which the Commission effectively endorsed, put a floor under wages growth at a time when it should have been falling.
The Government and the ACTU have claimed, of course, that the accord provided "flexibility" in as much as full indexation was not applied in practice. The accord has also, it is claimed, led to a large increase in employment since 1982/83 and prevented the wage "outbreaks" that have occurred in the past. However, given the level of unemployment, it is extremely doubtful that any serious wage outbreaks would have occurred for a few years after 1981/82 had a firmer line been taken on unions' claims. Moreover, while falling real unit labour costs have undoubtedly been a major contributing factor to the growth in employment since 1982/83, that increase has very largely gone into consumer service jobs of various types and has thus also reflected to an important extent the stimulation of domestic demand under the fiscal/monetary policies pursued by the Government. As such, these jobs rest on shaky foundations given that domestic spending will now need to be severely restrained in order to cope with the excess debt problem. In a sense those jobs are living on borrowed time: the extent to which, overall, unemployment can be contained to 6-6.5 per cent will now depend to a significant extent on the capacity of the tradeable goods sector to provide additional employment.
As to "flexibility", while reductions have been achieved in real unit labour costs under the accord, the fact remains that these have done very little to narrow the gap between the growth in wage costs in Australia and overseas. Of particular concern in the continued higher growth in Australia's nominal unit labour costs has been the recent slower growth in Australian productivity, which reflects, inter alia, over-manning and restrictive work practices that have, in some cases, become entrenched in awards by the arbitration authorities.
Moreover, even if it be conceded that the accord "delivered" in the sense of allowing reductions in real wages, the benefits of this in terms of lowering costs was at least partly offset by the continued high growth in government spending/taxation up to 1986/87 i.e. the alleged trade-off of reducing real wages in return for increasing the social wage via government welfare etc was not a costless exercise if viewed in aggregate terms. This is rarely acknowledged.
But the excessive increase in wage costs (which reflects terms of employment as well as increased wages), has had other significant adverse effects which have indirectly contributed to the growing current account deficit problem. In particular, the profitability of business investment has been squeezed and, notwithstanding the recent strong recovery, it may not yet be at adequate levels. This is particularly so given that wage "outbreaks" such as those in the mid 1970s and the early 1980s have almost certainly raised the risk premium on investment -- and thus contributed to the increase in the required rate of return before real investment will be undertaken. (25) These wage outbreaks, and other inflexibilities in the system (such as in awards for juvenile wages), have also undoubtedly contributed directly to the substantially higher levels of unemployment that have existed over the past 15 years or so.
It is difficult not to conclude, therefore, that the out-turn of the existing wages system has been an important cause of the weakness (relative to GDP) in business fixed investment and the resultant slower real growth in the capital stock, as well as (both directly and indirectly) the rise in unemployment. Further, the strong growth in such investment since 1987-88 may largely have been replacement investment and does not appear to have expanded the traded goods sector to any significant extent. In short, the longer run effects of the wages system have been to reduce the supply of both capital and labour below what has been needed to ensure satisfactory economic performance. The indirect ramifications have also been significant. For example, the increase in unemployment has added to social welfare spending and this has put upwards pressure on government borrowings, etc.
Monetary Policy
Monetary policy is generally regarded as the "last resort" mechanism for adjusting the gap between national spending/income when all other policies fail. Monetary policy also carries primary responsibility for controlling inflation. Judged on this basis one must conclude that, taking the past 15 years as a whole, monetary policy has also failed. (26) In short, given other policy failures, monetary policy needed to have been tighter and interest rates higher so as to reduce borrowings and spending to a rate consistent with income growth and with price stability.
This is particularly relevant to the period of financial deregulation since the early 1980s. By removing, or at least reducing, constraints on the efficient performance of financial intermediaries, particularly banks, the Government and the monetary authorities ought to have anticipated that there would be an increase in the demand for borrowing and that, without a tightening of policy, increased competition between financial intermediaries would lead to cutting of lending margins and to some lowering of lending standards so that, unless restrained, total private sector borrowings would increase faster than GDP. This is, indeed, what has happened (see Table 2).
It is true that part of the increased borrowing from intermediaries reflects the fact that they have increased their share of total finance raised by the private sector. Even so, both total private sector financial liabilities and total private sector debt have been increasing significantly faster than GDP and the Reserve Bank has recently argued that this has largely been reflected in higher asset prices. (27) However, either directly, or indirectly via the increase in prices of assets whose purchase was effected by increased borrowing, this much faster growth in credit has also undoubtedly contributed to excessive spending. This, together with the increase in private sector gearing at a time when public sector gearing and total external gearing were also increasing and the continued excessive rate of inflation, raises serious doubts about the adequacy of monetary policy during this period. It certainly suggests a need to take greater account of trends in private sector debt in framing monetary policy.
This is not to suggest that monetary policy should have been the prime force used to restrain national spending. Obviously, undue reliance on monetary policy tends to have adverse effects on business investment in particular, although the fact that the real after tax cost of borrowing has been negative for most of the period since the mid 1970s, and that it remains low, suggests that such effects may be overstated. Indeed, many argue that the tax system provides an incentive to borrow and that this has been the major driving force behind the increase in investment in financial, if not real, assets. Of greater interest rate sensitivity (including from a political viewpoint) may be consumer spending, especially on housing, the interest on borrowing for which is not tax deductible.
At all events, there can be no doubt that, for one reason or another, policy makers have frequently avoided applying the degree of monetary restraint that was needed to keep total spending in hand. Of course, in the absence of other policy measures, the monetary authorities and their masters are ultimately forced by market reactions to the threat of inflation and exchange rate consequences to allow interest rates to rise to restrain excess spending; hence, we now have record high real interest rates. But the political sensitivities inherent in using monetary policy as the major weapon to control spending have almost inevitably meant that monetary restraint has been applied in fits and starts. This tendency towards alternate bouts of easing and tightening has been exacerbated by the knowledge of the decision makers that the effects of monetary restraint are necessarily imprecise and by their constant fear of "overshooting" and producing a recession, even a depression: one might say that the authorities normally readily agreed when there was a need for "restraint" -- but inevitably added "not too much". The generally short term perspective of the financial community has added to the pressure to ease or tighten policy as soon as the first sign emerged that total spending was under or out of control.
But how do we judge the application of monetary policy? It is beyond the scope of this paper to examine that for the whole period since the early 1970s but some comments need to be made in respect of the period of most rapid growth in external debt, viz, since the early 1980s. That period has broadly coincided with financial deregulation and the apparent loss of any firm relationship between monetary aggregates, activity and prices, which has, in turn, made it more difficult to gauge the stance of policy.
However, particularly since the abandonment of monetary targeting in January 1985, it has become clear that monetary policy settings have increasingly been adjusted primarily by reference to levels of interest rates, rather than to changes in monetary aggregates. (28) Thus, we need to judge the degree of "tightness" or "looseness" of monetary policy primarily by the extent to which short term rates are higher or lower than longer term rates, i.e. the extent to which the yield curve is inverted or normally upward sloping.
An examination of movements in interest rates on this basis thus indicates a very uneven application of monetary policy that has not necessarily been related to economic requirements. In particular, there was an easing of policy in the 1984 pre-election period and a further easing in the 1987 pre-election period, followed in each case by a major tightening. Thus, the stance of monetary policy came to be unduly influenced by short term political objectives, including even by State elections. One longer-term result of all this may have been that, by raising the level of uncertainty, the level of real interest rates has been unnecessarily increased. Moreover, such stop-go policy changes can scarcely have been conducive to creating a favourable environment for business planning and investment.
GRAPH 4
TRENDS IN MONETARY POLICY
(Cash Rate - 10 yr. Treasury Bond Rate)
RBA Bulletin (various)
Financial Deregulation and Exchange Rate Policy
The various moves to deregulate the financial system from the early 1980s have been widely -- and correctly -- hailed as providing benefits in the form of expanding and deepening the market for raising capital, and of reducing the cost of financial services. This has been conducive to corporate restructuring. Further, the comparative freedom of capital to flow into and out of Australia, subject only to the relatively moderate restrictions on inwards direct foreign investment, has exposed us more fully to the tests of the international market place.
However, it is sometimes overlooked that, even under the previous "fixed" exchange rate system, it was not possible to avoid those tests. Of course, exchange controls did limit the extent of speculative capital flows and allowed exchange rate changes to be delayed. Nonetheless, sooner or later exchange rate changes had to be effected -- and were effected -- once it became clear that there was a major change in the underlying external situation facing Australia. (29) More importantly, under the "fixed" exchange rate system the need to change the rate was widely accepted as also requiring adjustments to other domestic policies at the same time i.e. it was accepted that the solution to excessive balance of payments deficits required changes in domestic polices as well as the exchange rate.
Unfortunately, the move to a "floating" rate system in December 1983 resulted in the initial stages in the Government placing undue reliance on the exchange rate as the adjustment mechanism. In fact, it was not really until mid 1986 that the Government appears to have begun to recognise that continuing depreciations in the nominal exchange rate were not sufficient in themselves to restore a better underlying balance between domestic spending and income -- and would run other risks. (30) The failure of the substantial depreciation in the real exchange rate between early 1985 and late 1986 to generate the necessary shift in resources to reduce the current account deficit on a sustained basis reflects a wide variety of factors, including the continued high level of public sector demand and borrowings, the continued high level of inflation, the inhibiting effects of the inflexible industrial relations system, and of the associated high costs of services provided by public trading enterprises, on investment to expand capacity (particularly in the traded goods sector), and the uncertain world economic outlook.
GRAPH 5
REAL EFFECTIVE EXCHANGE RATE
(Against 15 Industrial Countries *}
J.P.Morgan (various)
* Average 1930-1982 • 100.
The subsequent reductions in public sector outlays and borrowings have recognised the need to "make room" for an expansion in the traded goods sector, but have not been sufficient or adequately supported by changes in other policies. One consequence has been that the use of high interest rates in order to reduce demand and contain inflationary pressures has reversed the downward trend in the real exchange rate, (31) with the result that by rnid 1989 it was only 9 per cent below the level reached immediately prior to the depreciation in early 1985.
SUPPLY SIDE DEFECTS
The other "blade" of the debt gap "scissors" (i.e. apart from excess spending) has been inadequate real income growth, due to inadequate growth in productivity and investment. There have been various disincentives to increasing productivity and investment and much investment has been channelled into inefficient and internationally uncompetitive areas.
While it is difficult to reach a comprehensive conclusion on changes in government policies affecting the supply side since the early 1970s, it seems probable that, overall, they have been detrimental: certainly the rate of economic growth per head has slowed by comparison with the 1950s and 1960s and Australia has slipped down the per capita growth stakes ladder among OECD countries. By comparison with the dynamic North Asian countries, we have slipped even further.
An important factor inhibiting economic growth has been the massive increase in government regulation of business. As the Industries Assistance Commission noted in its 1986/87 Annual Report, the coverage of regulatory reforms "remains small in relation to the array of government interventions which have the potential to impede economic adjustment and the development of efficient industries" and which have been built up since the early 1970s.
However, possibly the most significant influence has been the expansion in the size of government and the disincentive effect which the interaction of high taxation and increased welfare spending has had on productivity, saving and investment. The enormous expansion in public consumption can be seen as having "crowded out" private investment (Table 12), this being reflected in turn in a slower real growth in the capital stock and higher unemployment.
It is sometimes pointed out that the size of government and overall burden of taxation in Australia are relatively low compared with OECD countries and that their economic performance has often been better than ours; accordingly, it is argued, we should not seek to explain our deteriorating economic performance by reference to increased size of government. However, as noted, the OECD has itself affirmed the detrimental economic effects of the increase in government in OECD countries. A more relevant comparison might be with the dynamic North Asian countries, where the size of government is much smaller and where economic performance has improved.
In addition, Australia's own particular circumstances have to be taken into account. With a small population and a large area, the per head cost of providing government services at any given standard is almost certainly greater than the more densely populated Europe and North America. Thus, to the extent that Australia provides equivalent standards of government services to those in Europe and North America, the higher cost will be at the expense of growth in the rest of the economy. In short, Australia may need to have somewhat lower standards of government services, and hence lower government outlays and taxation, if it is to achieve economic growth in per head terms even comparable to the relatively poor performing OECD countries.
This is particularly relevant to the government services provided outside the government sector proper. Although the relative size of the Australian public "enterprise" sector has probably not increased since the early 1970s, Australia now has one of the largest public "enterprise" sectors among OECD countries, with about 20 per cent of our total capital stock being in that sector. Further, it is clear that much of the capital has been earning an inappropriately low rate of return. ABS figures of returns on capital stock (32) show that public trading enterprises earn 10-12 percentage points less than private trading enterprises. To have a substantial proportion of our capital stock operated in a relatively unproductive manner has detracted from our economic growth.
It is relevant that 68 per cent of the public sector is unionised while only 32 per cent of the private sector is. One has to wonder why public sector unions have been needed at all, given that the public sector "bosses" in public enterprises have hardly been greedy capitalist exploiters! The answer presumably is that it is easier to get the public sector to condone restrictive work practices and over-manning. The rest of the community has been paying for this low productivity.
But the public sector is not alone in having capital invested that is producing inadequate returns to the nation and adding costs to other sectors. It is clear from successive IAC Annual Reports that, notwithstanding many "reviews" and industry "assistance" schemes instituted with the avowed intention of lifting productivity, until the April 1988 reductions in motor vehicle protection there had been virtually no progress in reducing the level of protection to manufacturing industry since the 25 per cent tariff cut in the mid 1970s. Even with the April 1988 changes, effective levels of protection provided to some manufacturing industries remain very high. Also, as the 1987 IAC Report noted, the provision of "positive assistance" by the Government may in fact have been detracting from economic performance.
Another important factor detracting from the supply side has been the structure of taxation (as distinct from the overall burden). In particular, the continued emphasis on a highly progressive personal income tax rate scale has not only offered powerful incentives to avoid tax, but has seriously inhibited incentive and contributed to reducing income growth. There have also been numerous tax exemptions, rebates and credits which have artificially encouraged economic activity in certain areas at the expense of others. In similar fashion the indirect tax system has had far too narrow a base, as well as incorporating multiple rates of tax, thereby distorting consumption and, through the taxation of business inputs, business decisions. As the 1985 Draft White Paper on Tax Reform put it "Like the personal income tax base and the company tax base, the narrow base of the consumption taxes also means that high rates are required to raise significant amounts of revenue."
Many have suggested that income has borne too great a burden of the raising of revenue and that greater emphasis on taxing expenditure would have helped to reduce consumption and increase saving, and enhanced the scope for reducing high marginal tax rates of personal income tax and reducing or eliminating company tax. However, while this approach has theoretical validity, other countries which have increased their reliance on consumption taxes have experienced a similar downtrend in domestic saving propensities. There are also broader considerations that also need to be taken into account. In particular, a major shift to indirect taxation, accompanied by reductions in personal income rates, would ease the pressure on governments to reduce government expenditure and would make it politically easier to edge up tax rates in the future.
It is also pertinent that the basis of taxation of income derived from assets has involved significant distortions in a period of high inflation and has almost certainly contributed to the increase in business gearing. Thus, even though a substantial part of interest does not represent real income but includes a component simply to allow for inflation, lenders have been taxed on the whole of the interest income while a business borrower has been able to deduct the whole of the interest cost of a borrowing. The Reserve Bank has attributed "much" of the increase in private sector borrowing in recent years to "the growing recognition of the favourable effects of the deductability of interest payments on debt when the rate of inflation is high". (33) But the solution to this problem may lay more in reducing inflation than in altering the tax system.
WHAT SHOULD BE DONE?
The foregoing analysis of the causes of Australia's excess debt problem enables ready identification of the main elements of the policy changes needed to overcome the problem. Essentially, the task confronting governments is to change both macro and micro economic policies so that, both for Australia as a whole and at more disaggregated levels, the gap between spending and income can be closed.
It is most desirable that these policy adjustments should minimise the extent to which adjustment is by way of overall restraint and should maximise reliance on enhancement of income growth relative to spending. Maximisation of real income growth will minimise the pain in terms of foregone living standards. Nonetheless, restraint on spending will inevitably be necessary, especially in the near term and above all in respect of public sector spending.
The Government has argued that it is "moving in the right direction" both in terms of macro and micro policy changes. Three points need to be made in regard to this claim.
First, in terms of reducing the imbalance between spending and incomes, substantial progress has been made since 1986/87 by reducing public sector outlays and by converting the public sector to a net saver. However, it needs to be recognised that a not insignificant proportion of the reduction, relative to GDP, in public sector outlays and borrowings is not sustainable as it reflects a reduction in capital rather than recurrent outlays (Table 12). Further, the size of the public sector is still well above levels of the early 1970's, as is spending on social security. Moreover, the stop-go operation of monetary policy, particularly since 1986, leaves a good deal to be desired. (34) Monetary policy needs to target a progressive reduction in inflation and to be operated in a much more accountable way. The legislation governing the Reserve Bank should be altered to make specific provision for this.
Second, it is by no means clear that all major policies have been moving in the right direction. In particular, notwithstanding changes to details of the wages accord which appear to have produced a better outcome, the reality is that there has been minimal closing of the gap between the growth in our nominal unit labour costs and those of our major competitors. Although the indexation of wages has been abandoned, the Government has continued to support before the Industrial Relations Commission wage increases well in excess of most international competitors. In a context where Australia's recent productivity performance has been poor, this is particularly inappropriate. In addition, the Government's approach to the industrial relations system still appears to be to maintain the centralised nature of the system as well as the role of the Industrial Relations Commission and, through amalgamation of trade unions, to strengthen the bargaining position of the trade union movement.
Yet what is needed is a wage negotiation system under which wages and conditions of employment are negotiated primarily at the enterprise level so that there is incentive for those most directly involved to negotiate increases in productivity and to share in the benefits. In a sense we need more unions not less -- but unions based on individual companies or even plants. Any move to such a system would require substantial changes to existing arrangements in order, inter alia, to eliminate the compulsory nature of the present arbitration system and to provide protection for individual employees and employers from attempts by unions to exercise monopoly powers to prevent the conclusion of wage agreements that involve increases in productivity/reductions in nominal unit labour costs. A reduction in union powers would also be essential in order to limit the scope for wage "break outs" that spread through the economy. However, the prevention of excessive wage increases would still require pursuit of firm fiscal and monetary policies, of course.
The third point to make regarding the "moving in the right direction" claim is that the pace of change has been far too gradual and senior Government Ministers have fluctuated between raising and lowering expectations of increased living standards. The "gradualist" adjustment approach has failed to recognise that, provided changes in monetary and fiscal policies are credible, businesses and individuals will quickly revise their expectations, thus strictly limiting the extent and duration of any reduction in output and employment as resources are shifted between sectors of the economy. By seeking to effect adjustment over a period this "gradualist" approach has condemned Australia to a considerable period of slow economic growth, with a significant risk of recession, as too many resources continue to be employed in the wrong areas and as macro-economic policies have had increasingly to be tightened in order to contain national spending. The risk of a recession is considerably enhanced by the excessive level of our external debt and the likely slowing in overseas growth as overseas countries have increasingly used up spare capacity. Moreover, while the current consensus is that the U.S. is likely to avoid a recession, that risk remains. Against that background Australia should have been taking out insurance against the likelihood of an overseas slow down, let alone the risk of a recession, instead of allowing a continuing increase in external debt ratios.
The experience of the 1986/87 financial year suggests that greater potential exists for speeding up the adjustment process without sending the economy "through the floor". The considerable tightening of policy in that year resulted in a greater than expected reduction in the growth of domestic demand and a greater than expected improvement in the external account, all with only a marginal rise in unemployment. The subsequent easing of monetary policy, regrettably, undid this good work, allowing the current account deficit to continue at an excessively high level.
The pace of change has also been inadequate in regard to policies affecting the supply side of the economy. Certainly, the reduction in the top marginal rate of personal income tax to 49 per cent (50.25 per cent including the Medicare Levy), the reduction in company tax to 39 per cent, and the elimination of double taxation of company income (though not corporate retentions) have been important improvements. However, there has been an increase in the overall burden of taxation over the life of the present government (35) and inflation will continue to move increasing proportions of the working population into the still-high tax brackets.
Against this background, while there is a sound theoretical case for increasing the relative emphasis on indirect taxation, it seems desirable to give priority to moving to a single rate of personal income tax and to reducing the overall burden. That need not preclude reform of the indirect tax system on a revenue neutral basis: the main thing to avoid is a major increase in indirect tax with the proceeds being used to finance major reductions in income tax. That would run too high a risk that governments would subsequently shirk the task of reducing the overall burden and of moving to a single rate of income tax.
Some people object to the notion of a single rate of personal income tax because they see it as "inequitable" that high and low incomes should pay the same rate of tax. But that overlooks the point that there would still be redistribution of income as those on higher incomes would receive nothing back from the Government. It also overlooks not only the continuing disincentive effects from high marginal rates, but the encouragement that those rates give to consumption at the expense of saving and investment. (36)
As there is a strong case for the public sector to maintain a substantial budget surplus on a permanent basis (in essence the public sector needs to be a net saver in order to offset the "loss" of private sector savings that has resulted from increased social security expenditure), any reduction in the real overall burden of taxation requires a further reduction in the size of government and particularly in recurrent outlays. While public sector outlays are now well below the peak of 42.8 per cent of GDP reached in 1985/86, particularly as a substantial proportion of the reduction has been in capital outlays, there is a long way to go.
In other micro-economic areas, while the Government has announced its intention to undertake a broad ranging program of reforms, and has instituted a number of inquiries/reviews, there has so far been only limited action to improve productivity and competitiveness. Even the April 1988 reductions in motor vehicle protection seem unlikely to do much in this regard. The greatest progress has been made by those businesses which have been prepared on their own initiative to confront or avoid existing institutional arrangements. The Government must recognise that markedly different arrangements are needed in the industrial relations area if an environment conducive to improved long run economic performance is to be provided.
Those who argue that radical action is "impracticable" and cannot be "forced" on society do not address the point that, unless society is "persuaded" to take such a course, the continuation of a "gradualist" approach towards change will result in even more drastic action being required later. As recently as 1987 it was being claimed that it was "impracticable" to reduce the size of government or to move to a public sector surplus. If the Government were to provide the community with a realistic assessment of the difficulties we face, the policies to overcome those difficulties could be successfully implemented at a faster pace.
If faster progress is to be made, the Government should set a three year program that aims to reduce Australia's external debt/debt servicing ratios at least back to the early warning points used by international private sector lending institutions. Such a program should include as key elements:
- a reduction in government outlays of around two percentage points of GDP annually to around 31 per cent;
- maintenance of a net public sector surplus of around two per cent of GDP;
- subject to (ii), a reduction in the real burden of taxation and restructuring oi the income tax system on the basis of a single rate of personal income tax;
- the move to a wage negotiation system that allows/encourages agreements between employers and employees that provide for increases in productivity. This would best be achieved by a system under which wages and conditions of employment are negotiated primarily at the enterprise level, with full protection for individual employers and employees from attempts by unions to exercise monopoly power;
- the improvement of productivity in the public sector through the virtual elimination of controls preventing businesses from competing in the markets of goods and services produced by most public enterprises, and the privatisation of the majority of such enterprises;
- the reduction of costs through a reduction of industrial protection against imports at a significantly faster rate than envisaged by present plans;
- a commitment to have monetary policy target the progressive reduction in inflation to 2 per cent per annum and alteration to the legislation governing the Reserve Bank to make the operation of monetary policy more publicly accountable;
Pending an improvement in productivity, it will be necessary to have policies which exercise heavy restraint on consumption spending. To the extent that other policies do not ensure this, monetary policy will need to be operated so as to produce continued high real interest rates. There should, in any event, be an acknowledgment that the operation of monetary policy in the deregulated financial environment, and in circumstances of excessive overseas debt, needs to take greater account of trends in private sector debt.
To state such a program is to indicate just how considerable our difficulties are. The worst is not necessarily over and we will need strong leadership from the Government, and from other groups, if our debt problem and its underlying causes are to be overcome.
FOOTNOTES
1. In his Shann Memorial Lecture of 15 September 1987 the Governor of the Reserve Bank argued that there were some important differences between the then existing situation and that existing prior to the 1930s depression. He referred, inter alia, to the facts that net debt was around one third of GDP whereas it was over one half just prior to the 1930's depression and that a much greater proportion of debt is now private sector debt. He also acknowledged, however, that net interest payments on overseas debt were around the levels of the late 1920s and that there were other similarities, including a slowing world economy.
In a paper presented at a Seminar on Debt in September 1987, Professor Boris Schedvin suggested that when property income payable abroad had previously reached 25 per cent or more of current receipts there was a significant probability of a depression following. This had occurred in the 1890's and 1930's. Gross property income payable abroad reached around 25 per cent of current receipts in 1986/87 (see Table 7).
2. Statements by Government Ministers and agencies have mostly been in terms of stabilizing the debt ratio by reducing the current account deficit to about 2.5 per cent of GDP, at which level debt should increase at about the same rate as GDP. However, the Government has not indicated any particular debt ratio which it regards as sustainable. EPAC has made various projections of stabilisation ratios which might be taken to imply that it considers that net debt of 30-40% of GDP is sustainable. See, for example, EPAC Paper No 22 of October 1986 on "External Balance and Economic Growth" (which projected a scenario envisaging a stabilisation of the net external debt/GDP ratio at 40 per cent with a current account deficit of about 3 per cent of GDP); EPAC Paper No 30 of March 1988 on "Australia's Medium Term Growth Potential", which contained a revised scenario with debt stabilizing at 34 per cent of GDP and the current account deficit at 2.6 per cent; and EPAC Discussion Paper 89/60 of June 1989 which stated that "a current account deficit of 2.5% of GDP is needed to stabilise the debt relative to GDP" and that "it may be feasible to meet the immediate objective of stabilising the debt at around present levels or possibly somewhat higher, while maintaining economic growth over the medium term; the extent of growth will depend on the associated increase in net exports." At the time of issuing this latter paper the current account deficit was running at over 5% of GDP and the net debt ratio was around 32 per cent of GDP. If net debt ratios in the range of 30-40 per cent of GDP are regarded as too high, the current account deficit would need to be reduced below 2.5 per cent for a period.
3. See World Debt Tables, External Debt of Developing Countries, 1987/88 Edition. The report stated that in the 1980s per capita incomes of highly indebted middle-income countries had fallen by one seventh and those of highly indebted low-income Sub-Sahara African countries by nearly one quarter. "The result has been lower personal consumption and increasing social and political problems. More serious for these countries' economic prospects, investment has collapsed."
It is also worth noting, perhaps, that adherents of the so-called "Elliot Wave" theories that have become extensively used in analyzing share market trends, and of long term business cycles of the type postulated by Krondratieff, base a major part of their predictions on trends in debt.
4. See, for example, "Does Australia Really Have A Current Account Problem" by Professor John Pitchford in "Policy" Vol.5 No.2 Winter 1989 The Centre for Independent Studies, and five articles in "The Australian Economic Review" 2nd Quarter 1989 published by the Institute of Applied Economic and Social Research, University of Melbourne. See also my reply to Professor Pitchford "Why Australia Has a Current Account Problem" in "Policy" Vol.5 No.3 Spring 1989.
5. Reserve Bank of Australia: Report and Financial Statement of 30th June 1989.
6. "Public Principles of Public Debt: A Defence and Restatement" (Richard D Irwin). Buchanan, who subsequently (1986) won the Nobel Prize for Economics, claimed to be doing no more than to restate principles well established by earlier writers but forgotten in developing what he described as the "new orthodoxy". That new orthodoxy claimed that the creation of public debt does not involve any transfer of the primary real burden to future generations; that there is no analogy between individual or private debt and public debt, and that there is an important distinction between internal and external debt. Buchanan argued that all these propositions are false.
7. In this regard, it needs to be recognised that the effect of an external borrowing is to add to the domestic expenditure and income stream as compared with an internal borrowing. The servicing of external debt does not necessarily, therefore, constitute a net addition to the servicing cost of any given level of total debt provided there is a higher on-going private income stream to service the debt. Thus, the net position of the economy will depend on how the external borrowings are employed. But that also applies to internal borrowing.
There will of course be differences between the nominal interest cost of borrowing domestically and borrowing overseas in foreign currency, reflecting differences in inflation rates and expected inflation rates. However, those differences should be compensated for/offset by changes in relative exchange rates. To the extent that nominal interest rate differences take inadequate account of exchange rate changes, there may be either an additional or lesser burden from external borrowings in foreign currency.
8. Of course, the cost of borrowing, relative to the cost incurred by other countries, has increased e.g. the downgrading in the Australian Government's credit rating in the New York market in 1986 probably added 0.125 to 0.25 per cent to the cost of $US borrowing overseas. These "spreads" between $US issues by Australian borrowers and by comparable U.S. borrowers have since widened further. There has also been a marked widening in the differential between domestic interest rates and interest rates in major financial markets overseas, even though inflation differentials have remained relatively stable i.e. the real cost of borrowing domestically has increased by comparison with the cost to Americans of borrowing domestically. For example, between end 1987 and mid 1989 the differential between short-term Australian and US interest rates widened from about 3 percentage points to 8-9 percentage points.
9. Notwithstanding the temporary nature of the increases from mid 1986 to early 1987, as can be seen from Graph 4 they were sharp.
10. "Money, Credit and The Demand for Debt" by Mr. I.J. Macfarlane, Reserve Bank Bulletin May 1989.
11. Interest payments by the corporate sector have been growing much faster than GDP and than net operating surplus (see Table 8).
12. It may be argued that the faster rise in private sector debt than in other liabilities (equity) does not necessarily represent the true picture given that equity is recorded at book value. Thus, if equity is valued at market values, the rise in debt/equity ratios is relatively small. (See "Money Credit and the Demand for Debt" by Mr. I.J. Macfarlane, Reserve Bank Bulletin, May 1989). However, as the fall in equity values on 19 October 1987 shows, there are hazards in relying on market values, particularly as the rise in equity values partly reflects borrowings to finance purchases of equity.
13. In 1981, 10 per cent of foreign debt domiciled abroad (which constitutes over 80 per cent of total externally held debt) had a definite maturity period of less than one year. In 1988 over one quarter of such debt had a maturity period of less than one year. Debt with a maturity period of ten years or more accounted for 42.6 per cent of debt domiciled abroad in 1981 and only 9 per cent in 1988 (see ABS 5305.0 1987/88 and 1985/86).
14. Spending is defined here to include the consumption of capital and income to include national disposable income plus depreciation, i.e. what was available to spend including by using up capital.
15. This is not to say that the increase in external borrowings has all been used to finance increased consumption: the data does not allow the final use of overseas borrowings to be identified. But even if it is assumed that all external borrowings were used to finance investment, that would imply a reduction in the proportion of investment financed by domestic savings. This, in turn, would imply that increased consumption spending "crowded out" investment and forced it to be financed to a much greater extent from overseas savings (see Table 13).
16. Business Council Bulletin March 1989.
17. See, for example, ABS 5302.0 Balance of Payments December Quarter 1986 which presented calculations that showed that the current account deficit in 1985/86 would have been $6,856 million if prices of exports of goods and services had increased to the same extent as prices of imports between December 1984 and December 1986. This was less than half the recorded outcome of $14,499 million.
18. Statement of 11 September 1986.
19. Industries Assistance Commission Annual Report, 1987, page 52.
20. The main exception to this generalisation is the largely appropriate macro-economic policies pursued in the initial period of the Fraser Government. The reduction in public sector outlays and borrowings since 1986-87 has also been appropriate and essential. However, the impact of this was considerably reduced by the pursuit of inappropriate monetary policies for much of the subsequent period up to early 1988.
21. Those government policies include, of course, the substantial increase in public sector net borrowings and "loose" monetary policies which gave too much encouragement to borrowing in general.
22. See, for example, Edgar K Browning "On The Marginal Welfare Cost of Taxation" in the American Economic Review, March 1987.
23. The case is reinforced by the fact that governments have accumulated very large unfunded liabilities in the form of superannuation liabilities to employees and unfunded insurance liabilities under motor vehicles and workers compensation schemes.
24. The absence of any wages surge reflected the surplus "pool" of labour available from the rise in unemployment to over 10 per cent following the wages "outbreak" of 1981/82. The failure of that "pool" to have allowed a greater fall in wages reflects the Accord and the centralised industrial relations system. It was only during 1988-89 that the unemployment rate fell to levels at which wage pressures could be expected to increase: and that is exactly what happened. For further discussion of the Accord, see my "Industrial Relations and The Failure of the Accord: What Should be Done" in Australian Bulletin of Labor, Vol 15. June 1989, National Institute of Labor Studies.
25. The increase in the required rate of return before real investment will be undertaken reflects a variety of factors including increased returns on financial investment of a fixed interest nature.
26. the argument that monetary policy is a "last resort" mechanism rests on the fact that it is more susceptible to short term adjustment than either fiscal or wages policy and that changes in monetary settings produce rapid results in terms of financial flows. The effects on the real economy are lagged, however.
27. "Money, Credit and The Demand for Debt" by Mr. I.J. Macfarlane, Reserve Bank Bulletin May 1989.
28. Following the abandonment of monetary targeting in January 1985, the monetary authorities adopted the so-called "check list" approach of assessing the stance of monetary policy against trends in a number of economic variables. However, as the Governor of the Reserve Bank acknowledged in his Shann Memorial Lecture (op cit), this essentially involved a "judgemental or pragmatic approach to the setting of monetary policy". Over the past couple of years little further has been heard of the "check list" approach.
29. There was a period during the late 1970s/early 1980s when there was a deliberate policy of trying to keep the exchange rate as high as possible to help reduce inflation. It should be noted, however, that during most of this period there was a net surplus on total private sector foreign exchange transactions, i.e. it appears that, if there had been a "floating" exchange rate, the rate would have been even higher than the "fixed" rate.
30. A policy of allowing a continuing depreciation would, in due course, have led Australia down the Latin American track of high inflation and the associated economic and political instability.
31. Since early in 1988 the rate has been held up primarily as a result of the tightening of monetary policy and the large rise in interest rates. From late 1986 to early 1988 the rise in commodity prices caused the market to push the rate up.
32. Ratio of net operating surplus to net capital stock excluding land, financial assets and stocks.
33. Reserve Bank of Australia: Report and Financial Statements of 30th June 1989.
34. See, for example, Dr Ed Shann's article in Business Review Weekly for 29 January 1988. He suggested that on past history, the then current yield curve would cause demand to rise by 34 per cent at least. As subsequent history shows, there was indeed a very strong growth in demand, requiring a marked tightening of monetary policy.
35. Notwithstanding the personal income tax reductions, the overall burden of taxation in 1989/90 is likely to be slightly higher than in 1982/83.
36. At current inflation (and tax) rates, a pre-tax rate of return of about 16 per cent is necessary merely to maintain the purchasing power of an investment for those subject to a marginal tax rate of 50.25 per cent. By contrast, if the top marginal tax rate were (say) 33.3 per cent, and assuming inflation unchanged, the pre-tax rate of return necessary would then fall to 12 per cent.
Table 1: Total and External Debt
| Year End June | GDP $bn (a) | Total Debt (b) | Gross Ext Debt (c) | Net Ext Debt (d) | |||
| $bn | %GDP | $bn | %GDP | $bn | %GDP | ||
| 1970/71 | 35.1 | 45.4 | 129.2 | 4.6 | 13.1 | 2.1 | 6.0 |
| 1971/72 | 39.3 | 50.3 | 128.0 | 5.5 | 14.1 | 1.5 | 3.9 |
| 1972/73 | 44.8 | 57.4 | 128.0 | 5.3 | 11.9 | 0.7 | 1.7 |
| 1973/74 | 53.7 | 65.0 | 121.2 | 5.0 | 9.3 | 1.2 | 2.2 |
| 1974/75 | 64.6 | 73.5 | 113.7 | 6.0 | 9.2 | 2.1 | 3.3 |
| 1975/76 | 76.4 | 84.1 | 110.1 | 6.0 | 7.8 | 2.4 | 3.1 |
| 1976/77 | 87.2 | 97.5 | 111.8 | 7.8 | 9.0 | 3.9 | 4.5 |
| 1977/78 | 94.8 | 111.3 | 117.4 | 10.1 | 10.7 | 6.2 | 6.5 |
| 1978/79 | 107.8 | 128.9 | 119.5 | 12.7 | 11.7 | 7.9 | 7.4 |
| 1979/80 | 122.6 | 146.5 | 119.5 | 13.5 | 11.0 | 6.9 | 5.6 |
| 1980/81 | 139.7 | 167.3 | 119.8 | 15.2 | 10.9 | 8.6 | 6.1 |
| 1981/82 | 156.8 | 197.7 | 126.1 | 24.4 | 15.5 | 16.5 | 10.6 |
| 1982/83 | 170.7 | 231.0 | 135.3 | 35.9 | 21.0 | 23.4 | 13.7 |
| 1983/84 | 192.4 | 266.4 | 138.5 | 44.1 | 22.9 | 29.9 | 15.5 |
| 1984/85 | 214.3 | 311.8 | 145.5 | 67.4 | 31.5 | 51.2 | 23.9 |
| 1985/86 | 238.6 | 361.6 | 151.5 | 92.1 | 38.6 | 75.0 | 31.5 |
| 1986/87 | 263.2 | 414.9 | 157.6 | 104.9 | 39.9 | 82.4 | 31.3 |
| 1987/88 | 297.0 | 484.8 | 163.3 | 117.0 | 39.4 | 90.3 | 30.4 |
| 1988/89 | 335.6 | 560.5 | 167.0 | 137.0 | 40.8 | 108.2 | 32.2 |
(a) ABS 5206.0 June Quarter, 1989, ABS 5207.0 May 1989
(b) RBA Bulletin, December 1988. June 1989 figure is the author's estimate.
(c) ABS 5305.0 1987/88, ABS 5307.0 June Quarter 1989, ABS 5306.0 March Quarter 1989 and RBA Bulletin. Dec/Jan 1984/85.
Table 2: Total Debt -- Public and Private Sectors
| PUBLIC SECTOR | PRIVATE SECTOR (b) | |||||||
| C'Wealth Sector (a) | State/Local Sector (a) | Total (a) | ||||||
| $bn | %GDP | $bn | %GDP | $bn | %GDP | $bn | %GDP | |
| 1970/71 | 14.4 | 41.1 | 5.5 | 15.5 | 19.9 | 56.6 | 25.5 | 72.6 |
| 1971/72 | 15.1 | 38.3 | 6.0 | 15.2 | 21.1 | 53.5 | 29.3 | 74.5 |
| 1972/73 | 15.9 | 35.6 | 6.5 | 14.5 | 22.5 | 50.1 | 35.0 | 78.0 |
| 1973/74 | 16.7 | 31.1 | 7.1 | 13.2 | 23.7 | 44.3 | 41.3 | 76.9 |
| 1974/75 | 19.0 | 29.4 | 7.8 | 12.1 | 26.8 | 41.4 | 46.7 | 72.3 |
| 1975/76 | 21.7 | 28.4 | 8.8 | 11.6 | 30.5 | 40.0 | 53.6 | 70.2 |
| 1976/77 | 25.0 | 28.7 | 10.3 | 11.9 | 35.3 | 40.6 | 62.1 | 71.3 |
| 1977/78 | 29.0 | 30.6 | 11.9 | 12.5 | 40.9 | 43.1 | 70.4 | 74.3 |
| 1978/79 | 34.1 | 31.6 | 14.0 | 13.0 | 48.1 | 44.6 | 86.8 | 75.0 |
| 1979/80 | 36.9 | 30.1 | 16.6 | 13.5 | 53.5 | 43.6 | 93.0 | 75.9 |
| 1980/81 | 37.8 | 27.1 | 19.6 | 14.1 | 57.4 | 41.1 | 109.8 | 78.7 |
| 1981/82 | 39.4 | 25.1 | 25.0 | 15.9 | 64.3 | 41.0 | 133.3 | 85.0 |
| 1982/83 | 44.6 | 26.1 | 30.9 | 18.1 | 75.5 | 44.2 | 155.5 | 91.1 |
| 1983/84 | 53.8 | 28.0 | 37.7 | 19.6 | 91.5 | 47.6 | 174.9 | 90.9 |
| 1984/85 | 63.3 | 29.5 | 43.8 | 20.5 | 107.1 | 50.0 | 204.7 | 95.5 |
| 1985/86 | 71.2 | 29.8 | 51.2 | 21.5 | 122.4 | 51,3 | 239.3 | 100.3 |
| 1986/87 | 76.1 | 28.9 | 58.8 | 22.3 | 134.9 | 51.3 | 279.9 | 106.3 |
| 1987/88 | 81.0 | 27.3 | 62.5 | 21.1 | 143.5 | 48.3 | 341.3 | 115.0 |
| 1988/89 (c) | 79.1 | 23.6 | 65.0 | 19.4 | 144.1 | 42.9 | 416.9 | 124.2 |
(a) RBA Bulletin, December 1988, Table A7.
(b) RBA Bulletin, December 1988, Table A8.
(c) Estimate by the author.
Table 3: Public Sector Borrowing and Current Account Deficit
| Year End June | Current Account Deficit | PSBR (Net) | ||
| $m (a) | %GDP (b) | $m | %GDP | |
| 1970/71 | 727 | 2.1 | 433 | 1.2 |
| 1971/72 | 272 | 0.7 | 504 | 1.2 |
| 1972/73 | -781 | -1.7 | 745 | 1.7 |
| 1973/74 | 889 | 1.7 | 403 | 0.8 |
| 1974/75 | 1165 | 1.8 | 3213 | 5.0 |
| 1975/76 | 1396 | 1.8 | 3457 | 4.5 |
| 1976/77 | 2441 | 2.8 | 3452 | 4.0 |
| 1977/78 | 3044 | 3.2 | 4674 | 4.9 |
| 1978/79 | 3714 | 3.4 | 5030 | 4.7 |
| 1979/80 | 2082 | 1.7 | 4404 | 3.6 |
| 1980/81 | 5607 | 4.0 | 4237 | 3.0 |
| 1981/82 | 9136 | 5.8 | 5320 | 3.4 |
| 1982/83 | 6826 | 4.0 | 9938 | 5.8 |
| 1983/84 | 7314 | 3.8 | 12859 | 6.7 |
| 1984/85 | 11053 | 5.2 | 10826 | 5.1 |
| 1985/86 | 14809 | 6.2 | 11495 | 4.8 |
| 1986/87 | 12899 | 4.9 | 9240 | 3.5 |
| 1987/88 | 11832 | 4.0 | 1042 | 0.4 |
| 1988/89 | 17426 | 5.2 | -3355 (c) | -1.0 |
(a) ABS 5303.0 1986/87 for 1966/67-1976/77, Treasury Round-Up
April 1989 for 1977/78-1985/86, & ABS 5301.0 July 1989
(b) For 1968/69 to 1981/82 PSBR supplied by ABS as per 5501.0 format
For 1982/83 to 1987/88 ABS 5501.0 1988/89
(c) Estimate PSBR, 1989/90 Budget Statements
Table 4: External Debt -- Public and Private
| Year End June | Public Debt | Private Debt | Total Debt | |||
| $M | %GDP | $M | %GDP | $M | %GDP | |
| 1970/71 | 1546 | 4.4 | 2805 | 8.0 | 4351 | 12.4 |
| 1971/72 | 1442 | 3.7 | 3797 | 9.7 | 5239 | 13.3 |
| 1972/73 | 1265 | 2.8 | 3638 | 8.1 | 4903 | 10.9 |
| 1973/74 | 1032 | 1.9 | 3461 | 6.5 | 4493 | 8.4 |
| 1974/75 | 1182 | 1.8 | 4181 | 6.5 | 5363 | 8.3 |
| 1975/76 | 1403 | 1.8 | 4575 | 6.0 | 5978 | 7.8 |
| 1976/77 | 2325 | 2.7 | 5487 | 6.3 | 7812 | 9.0 |
| 1977/78 | 4807 | 5.1 | 5326 | 5.6 | 10133 | 10.7 |
| 1978/79 | 6636 | 6.2 | 6015 | 5.6 | 12651 | 11.7 |
| 1979/80 | 7184 | 5.9 | 6314 | 5.2 | 13498 | 11.0 |
| 1980/81 | 6820 | 4.9 | 8399 | 6.0 | 15219 | 10.9 |
| 1981/82 | 9260 | 5.9 | 15090 | 9.6 | 24350 | 15.5 |
| 1982/83 | 14207 | 8.3 | 21684 | 12.7 | 35891 | 21.0 |
| 1983/84 | 17782 | 9.2 | 26320 | 13.7 | 44102 | 22.9 |
| 1984/85 | 29865 | 13.9 | 37608 | 17.6 | 67473 | 31.5 |
| 1985/86 | 42418 | 17.8 | 49633 | 20.8 | 92051 | 38.6 |
| 1986/87 | 48741 | 18.5 | 56165 | 21.3 | 104906 | 39.9 |
| 1987/88 | 55537 | 18.7 | 61482 | 20.7 | 117019 | 39.4 |
| 1988/89 | 61814 | 18.4 | 75222 | 22.4 | 137036 | 40.8 |
Sources
1970/71-1974/75 Treasury Round-Up, April 1984 Supplement.
From 1975/76 ABS 5305.0 1987/88 and ABS 5307.0 June Quarter 1988/89.
Note: The split between public and private debt varies in coverage. Prior to 1977/78 separate data is not available for overseas borrowings by public trading and financial enterprises. To the extent that such borrowings were not undertaken by Government (and, hence, reflected in Public), any such borrowings would be included in Private (or not recorded at all).
Table 5: External Debt -- By Sectors (Gross and Net)
| Year Ended June | PUBLIC SECTOR (GROSS) | PRIVATE SECTOR (GROSS) | TOTAL DEBT (NET) | |||||||||||||
| Official | Fin Ent* | Trad Ent* | Total | Fin Ent* | Trad Ent* | Total | Official | Fin Ent* | Trad Ent* | Total | ||||||
| $m | $m | $m | $m | % (a) | $m | $m | $m | % (a) | $m | % (b) | $m | % (b) | $m | % (b) | $m | |
| 1980/81 | 4816 | 289 | 1707 | 6812 | 45 | 1565 | 6787 | 8352 | 55 | -911 | -10 | 1350 | 16 | 8059 | 95 | 8499 |
| 1981/82 | 5692 | 515 | 3037 | 9244 | 38 | 2752 | 12183 | 14935 | 62 | -835 | -5 | 2682 | 16 | 14528 | 89 | 16375 |
| 1982/83 | 7682 | 696 | 5829 | 14207 | 40 | 3400 | 18284 | 21684 | 60 | -3073 | -13 | 3412 | 15 | 23046 | 99 | 23384 |
| 1983/84 | 8874 | 1197 | 7711 | 17782 | 40 | 5073 | 21247 | 26320 | 60 | -3546 | -12 | 5694 | 19 | 27746 | 93 | 29893 |
| 1984/85 | 14883 | 2530 | 12452 | 29865 | 44 | 9034 | 28574 | 37608 | 56 | 1260 | 2 | 10374 | 20 | 39575 | 77 | 51208 |
| 1985/86 | 23409 | 5505 | 13504 | 42418 | 46 | 14972 | 34661 | 496*33 | 54 | 10248 | 14 | 17639 | 24 | 47159 | 63 | 75045 |
| 1986/87 | 29857 | 6557 | 12327 | 48741 | 46 | 19802 | 36363 | 56165 | 54 | 11909 | 14 | 23505 | 29 | 47045 | 57 | 82449 |
| 1987/88 | 32761 | 10453 | 12323 | 55537 | 47 | 22803 | 38769 | 61572 | 53 | 11930 | 13 | 29162 | 32 | 49197 | 54 | 90289 |
| 1988/89 | 33728 | 16226 | 11860 | 61814 | 45 | 29492 | 45730 | 75220 | 55 | 12394 | 11 | 38805 | 36 | 56959 | 53 | 108159 |
* Financial (Fin) and Trading (Trad) Enterprises.
(a) Percent of total gross debt (for total gross debt, see Table 1)
(b) Percent of total net debt
Source: ABS 5307.0, June Quarter 1989, ABS 5305.0 1987/88, ABS 5305.0 1985/86.
Table 6: External Debt -- Currency of Denomination
| Year End June | Gross Debt | Denominated in $A | Denominated For Currency | ||
| $m | $m | % | $m | % | |
| 1979/80 | 13558 | 1723 | 12.7 | 11835 | 87.3 |
| 1980/81 | 15279 | 2198 | 14.4 | 13081 | 85.6 |
| 1981/82 | 24339 | 3127 | 12.9 | 21212 | 87.2 |
| 1982/83 | 35982 | 5395 | 15.0 | 30497 | 85.0 |
| 1983/84 | 44101 | 7278 | 16.5 | 36823 | 83.5 |
| 1984/85 | 67473 | 12782 | 18.9 | 54691 | 81.1 |
| 1985/86 | 92051 | 21175 | 23.0 | 70876 | 77.0 |
| 1986/87 | 104906 | 26146 | 24.9 | 78760 | 75.1 |
| 1987/88 | 117019 | 37421 | 32.0 | 79598 | 68.0 |
| 1988/89 (a) | 129326 | 51032 | 39.5 | 78294 | 60.5 |
Source: ABS 5305.0 1984/85 & 1987/88 and 5306.0 March Quarter 1989
(a) Year to March
Table 7: External Liabilities -- Debt and Equity
| Year Ended June | Net Equity (a) | Net Debt | Net Liabilities | ||
| $m | $m | %/Net Equity | $m | %/GDP | |
| 1979-80 | 19,471 | 6,863 | 35 | 26,334 | 21 |
| 1980-81 | 24,178 | 8,553 | 35 | 32,711 | 23 |
| 1981-82 | 22,028 | 16,547 | 75 | 38,575 | 25 |
| 1982-83 | 25,033 | 23,384 | 93 | 48,417 | 28 |
| 1983-84 | 25,275 | 29,893 | 118 | 55,167 | 29 |
| 1984-85 | 26,350 | 51,208 | 194 | 77,558 | 36 |
| 1985-86 | 21,109 | 75,045 | 356 | 96,154 | 40 |
| 1986-87 | 31,924 | 82,449 | 258 | 114,373 | 43 |
| 1987-88 | 30,847 | 90,289 | 292 | 121,136 | 41 |
| 1988-89 | 32,748 | 108,759 | 330 | 140,907 | 42 |
Source: ABS 5305.0 1987/88 and 5307.0 June Quarter 1989 for debt and equity data.
(a) Net equity equals the sum of net corporate equity (i.e. foreign corporate equity investment in Australia less Australian corporate equity investment overseas) plus net other equity investment in Australia.
Table 8: Total Debt -- Servicing by Sectors
| Interest Paid as Percentage of Current Receipts | |||||
| Public Sector (a) | Private Corporate Trading Enterprises (b) | Household Sector (c) | Financial Sector (b) | ||
| 1970/71 | 8.9 | 22.4 | (18.9) | 3.9 | 69.0 |
| 1971/72 | 8.5 | 24.8 | (20.9) | 3.9 | 69.9 |
| 1972/73 | 8.5 | 24.6 | (21.0) | 4.1 | 71.7 |
| 1973/74 | 7.2 | 28.2 | (23.1) | 4.6 | 76.0 |
| 1974/75 | 7.0 | 39.8 | (34.2) | 5.0 | 79.5 |
| 1975/76 | 6.5 | 39.1 | (33.2) | 5.3 | 78.8 |
| 1976/77 | 7.7 | 37.7 | (31.4) | 5.4 | 80.5 |
| 1977/78 | 8.5 | 41.3 | (33.9) | 5.6 | 84.7 |
| 1978/79 | 9.4 | 39.9 | (33.0) | 5.6 | 80.3 |
| 1979/80 | 9.3 | 41.1 | (33.8) | 5.7 | 82.3 |
| 1980/81 | 9.5 | 43.0 | (33.7) | 6.0 | 87.1 |
| 1981/82 | 10.0 | 55.6 | (45.9) | 6.8 | 91.4 |
| 1982/83 | 11.3 | 66.2 | (58.1) | 7.3 | 88.3 |
| 1983/84 | 12.7 | 52.0 | (43.4) | 6.9 | 89.0 |
| 1984/85 | 13.7 | 50.0 | (40.8) | 6.7 | 93.6 |
| 1985/86 | 15.1 | 54.4 | (44.4) | 8.0 | 94.0 |
| 1986/87 | 15.4 | 61.8 | (54.5) | 8.7 | 92.1 |
| 1987/88 | 14.4 | 58.0 | (51.0) | 8.2 | 93.3 |
| 1988/89 | 14.0 | 9.0 | |||
(a) ABS 5501.0 1988/89 for 1982/83 onwards. Previous years supplied by ABS in 5501.0 format.
(b) ABS 5204.01987/88 and advice from ABS. Figures in brackets show net interest paid as a percentage of net operating surplus.
(c) Interest payments as a percent of gross household income (including income of unincorporated enterprises) before deducting interest on dwellings and interest paid by unincorporated enterprises. ABS 5206.0 June Quarter 1989 and 5207.0 May 1989.
Table 9: External Debt/Liabilities -- Servicing
| Year End June | Exports | Interest on Gross Debt | Interest on Net Debt | Investment Income Payable O/seas (Gross) | Investment Income Payable O/seas (Net) | ||||
| $m (a) | $m (b) | % of exports | $m (b) | % of exports | $m (b) | % of exports | $m (b) | % of exports | |
| 1970/71 | 5065 | 236 | 4.7 | na | na | 759 | 15.0 | 607 | 12.0 |
| 1971/72 | 5659 | 293 | 5.2 | na | na | 819 | 14.5 | 603 | 10.7 |
| 1972/73 | 6984 | 296 | 4.2 | na | na | 1019 | 14.6 | 671 | 9.6 |
| 1973/74 | 7847 | 306 | 3.9 | na | na | 1177 | 15.0 | 673 | 8.7 |
| 1974/75 | 10087 | 404 | 4.0 | na | na | 1135 | 11.3 | 721 | 7.2 |
| 1975/76 | 11208 | 435 | 3.9 | na | na | 1587 | 14.2 | 1200 | 10.7 |
| 1976/77 | 13394 | 477 | 3.6 | na | na | 1820 | 13.6 | 1459 | 10.9 |
| 1977/78 | 14228 | 576 | 4.1 | na | na | 2010 | 14.1 | 1622 | 11.4 |
| 1978/79 | 16876 | 837 | 5.0 | na | na | 2415 | 14.3 | 1934 | 11.5 |
| 1979/80 | 21979 | 1109 | 5.1 | na | na | 3106 | 14.1 | 2447 | 11.1 |
| 1980/81 | 22531 | 1217 | 5.4 | 951 | 4.2 | 3164 | 14.0 | 2462 | 10.9 |
| 1981/82 | 23336 | 1874 | 8.0 | 1582 | 6.8 | 3449 | 14.8 | 2789 | 12.0 |
| 1982/83 | 25238 | 2894 | 11.5 | 2265 | 9.0 | 3542 | 14.0 | 2489 | 9.9 |
| 1983/84 | 28690 | 3786 | 13.2 | 2876 | 10.0 | 5832 | 20.3 | 4365 | 15.2 |
| 1984/85 | 34854 | 5352 | 15.4 | 4343 | 12.5 | 7563 | 21.7 | 6038 | 17.3 |
| 1985/86 | 38801 | 7078 | 18.2 | 6259 | 16.1 | 9490 | 24.5 | 7525 | 19.4 |
| 1986/87 | 43328 | 8260 | 19.1 | 7614 | 17.6 | 11343 | 26.2 | 8715 | 20.1 |
| 1987/88 | 50382 | 9129 | 18.1 | 8136 | 16.2 | 13525 | 26.8 | 10320 | 20.5 |
| 1988/89 | 54024 | 10593 | 19.6 | 9346 | 17.3 | 16456 | 30.5 | 12601 | 23.3 |
(a) Exports of goods and services ABS 5207.0 May 1989 & ABS 5206.0 June 1989.
(b) ABS 5305.0 1986/87 for 1970/71 to 1981/82, Treasury Round-Up August 1989 for 1984/85 to 1985/86, Treasury Round-Up Dec 1988 for 1982/83 and 1983/84, ABS 5307.0 August 1989 for 1986/87 to 1988/89. Investment income payable overseas is interest on overseas debt plus income payable on foreign equity investment.
Table 10: External Debt -- Some Warning Indicators
| Percent of Exports | ||||
| Net Debt | Gross Debt | Current Account Deficit | Interest on Gross Debt | |
| 1970/71 | 41.9 | 90.6 | 14.4 | 4.7 |
| 1971/72 | 27.3 | 97.6 | 4.8 | 5.2 |
| 1972/73 | 10.6 | 76.6 | -11.2 | 4.2 |
| 1973/74 | 15.0 | 63.7 | 11.3 | 3.9 |
| 1974/75 | 20.8 | 59.2 | 11.6 | 4.0 |
| 1975/76 | 21.4 | 53.3 | 12.5 | 3.9 |
| 1976/77 | 29.0 | 58.3 | 18.2 | 3.6 |
| 1977/78 | 43.3 | 71.2 | 21.4 | 4.1 |
| 1978/79 | 47.0 | 75.0 | 22.0 | 5.0 |
| 1979/80 | 31.2 | 61.4 | 9.5 | 5.1 |
| 1980/81 | 38.0 | 67.6 | 24.9 | 5.4 |
| 1981/82 | 70.9 | 104.4 | 39.2 | 8.0 |
| 1982/83 | 92.7 | 142.2 | 27.1 | 11.5 |
| 1983/84 | 104.2 | 153.7 | 25.5 | 13.2 |
| 1984/85 | 146.9 | 193.6 | 31.7 | 15.4 |
| 1985/86 | 193.4 | 237.2 | 38.2 | 18.2 |
| 1986/87 | 190.3 | 242.1 | 29.8 | 19.3 |
| 1987/88 | 179.2 | 232.3 | 23.5 | 18.2 |
| 1988/89 | 200.2 | 253.7 | 32.3 | 19.9 |
For sources, see other tables.
Table 11: National Income and Spending -- The Gap
| YEAR END JUNE | NDI $m (a) | DEP $m (b) | NDI+DEP $m (c) | GNE $m (d) | GNE/ NDI+DEP |
| 1970/71 | 30076 | 4540 | 34616 | 35124 | 1.01 |
| 1971/72 | 33643 | 5156 | 38799 | 38877 | 1.00 |
| 1972/73 | 38396 | 5823 | 44219 | 43205 | 0.98 |
| 1973/74 | 46218 | 6872 | 53090 | 53647 | 1.01 |
| 1974/75 | 55188 | 8905 | 64093 | 64918 | 1.01 |
| 1975/76 | 64519 | 10752 | 75271 | 76054 | 1.01 |
| 1976/77 | 73334 | 12450 | 85784 | 87696 | 1.02 |
| 1977/78 | 78967 | 14176 | 93143 | 95712 | 1.03 |
| 1978/79 | 89532 | 15906 | 105438 | 108936 | 1.03 |
| 1979/80 | 100959 | 18296 | 119255 | 121691 | 1.02 |
| 1980/81 | 114485 | 21094 | 135579 | 142220 | 1.05 |
| 1981/82 | 128080 | 24181 | 152261 | 162475 | 1.07 |
| 1982/83 | 138147 | 27720 | 165867 | 174474 | 1.05 |
| 1983/84 | 156195 | 30096 | 186291 | 194890 | 1.05 |
| 1984/85 | 172997 | 32797 | 205794 | 218927 | 1.06 |
| 1985/86 | 193619 | 37648 | 231267 | 245936 | 1.06 |
| 1986/87 | 212574 | 42561 | 255135 | 267965 | 1.05 |
| 1987/88 | 241458 | 46567 | 288025 | 299235 | 1.04 |
| 1988/89 | 275605 | 49694 | 325299 | 342317 | 1.05 |
(a) National Disposable Income -- it is equivalent to national income less net unrequited transfers to overseas.
ABS 5206.0 March & June Quarter 1989 for 1984/85 to June 1989. ABS 5204.0 1986/87 & 1987/88 for 1975/76 to 1983/84 and advice from ABS for 1974/75 and earlier.
(b) Depreciation
ABS 5221.0 1987/88
ABS telephone advice for earlier years. ABS 5206.0 for 1988/89.
(c) The total of national disposable income plus depreciation equals the amount available for spending other than from borrowing.
(d) Gross National Expenditure -- is the total expenditure within a given period on final goods and services (i.e. excluding goods and services used up during the period in the process of production) bought by Australian residents.
ABS 5206.0 March & June Quarter 1989 & 5207.0 May 1989.
Table 12: Consumption and Investment (% to GDP)
| Year to June | Consumption | Business Investment | Public Investment | Total Investment | ||||||
| Private | Government | Total | Construction | Equipment | Total | Public Enterprise | General Government | Total | ||
| 1970/71 1971/72 1972/73 1973/74 Average | 59.3 58.8 57.9 57.1 58.1 | 14.0 14.2 14.2 14.8 14.3 | 73.3 73.0 72.0 71.9 72.5 | 3.9 3.5 3.0 3.0 3.3 | 8.4 8.0 7.3 6.8 7.5 | 12.2 11.5 10.4 9.9 10.8 | 4.0 4.2 3.6 3.5 3.8 | 3.8 3.8 3.7 3.6 3.7 | 7.8 8.0 7.3 7.1 7.5 | 20.0 19.5 17.6 16.9 18.3 |
| 1974/75 1975/76 1976/77 1977/78 Average | 57.9 58.6 58.6 60.0 58.9 | 16.5 17.3 17.6 18.2 17.5 | 74.4 75.9 76.2 78.1 76.3 | 2.8 2.5 2.4 2.6 2.6 | 6.6 6.9 7.0 7.2 7.0 | 9.4 9.4 9.4 9.8 9.5 | 4.1 3.7 3.7 3.9 3.8 | 4.3 4.4 3.8 3.7 4.0 | 8.5 8.1 7.3 7.2 7.7 | 17.9 17.5 16.6 17.0 17.2 |
| 1978/79 1979/80 1980/81 1981/82 Average | 59.4 59.0 58.8 59.8 59.3 | 17.6 17.4 17.8 18.2 17.8 | 77.0 76.4 76.6 78.0 77.0 | 2.7 2.7 3.3 3.6 3.1 | 8.2 7.5 8.2 8.9 8.2 | 10.9 10.2 11.4 12.4 11.3 | 3.8 3.9 4.0 4.6 4.1 | 3.2 2.9 2.7 2.6 2.8 | 6.8 6.7 6.4 7.0 6.9 | 17.7 16.9 17.9 19.4 18.1 |
| 1982/83 1983/84 1984/85 1985/86 Average | 61.8 60.4 59.5 59.8 60.3 | 19.0 18.6 18.8 18.7 18.8 | 80.8 79.1 78.3 78.5 79.1 | 3.3 2.7 2.9 3.5 3.1 | 7.7 7.4 7.8 7.9 7.7 | 11.0 10.1 10.7 11.4 10.8 | 5.0 4.6 4.1 4.5 4.5 | 2.7 2.7 2.9 3.0 2.8 | 7.3 6.9 6.6 7.0 6.9 | 18.3 17.0 17.3 18.4 17.8 |
| 1986/87 1987/88 1988/89 | 59.2 59.1 57.0 | 18.5 17.7 17.0 | 77.7 75.9 74.0 | 3.6 4.3 4.4 | 8.1 8.1 8.1 | 11.8 12.4 12.5 | 4.2 3.4 3.2 | 3.0 2.5 2.2 | 6.8 5.5 5.4 | 18.5 17.9 17.9 |
Sources: ABS 5206.0 June Quarter 1989, ABS 5207.0 May 1989, ABS 5204.0 1987/88
Note: All investment figures are gross (i.e. before depreciation) and exclude investment in stock, dwellings and real estate transfers except for public investment figures for the period 1970/71 to 1975/76, for which separate figures on dwellings expenditure are not available.
Table 13: Public Consumption "Crowds Out" Private Investment
| Year To June | GNE (a) $m | Private Capital Exp (b) | Public Consumption (c) | ||
| $m | % of GNE | $m | % of GNE | ||
| 1970/71 1971/72 1972/73 1973/74 Average | 35124 38877 43205 53647 42713 | 6397 6963 7726 9125 7553 | 18.2 18.0 17.9 17.0 17.7 | 4904 5596 6348 7931 6195 | 14.0 14.4 14.7 14.8 14.5 |
| 1974/75 1975/76 1976/77 1977/78 Average | 64918 76054 87696 95712 81095 | 9671 12174 14397 15455 12924 | 14.9 16.0 16.4 16.2 15.9 | 10663 13190 15294 17207 14089 | 16.4 17.3 17.4 18.0 17.4 |
| 1978/79 1979/80 1980/81 1981/82 Average | 108936 121691 142220 162475 133831 | 18379 20366 25853 30169 23692 | 16.9 16.7 18.2 18.6 17.7 | 18969 21268 24914 28461 23403 | 17.4 17.5 17.5 17.5 17.5 |
| 1982/83 1983/84 1984/85 1985/86 Average | 174474 194890 218927 245936 208557 | 27985 30178 35957 41393 33878 | 16.0 15.5 16.4 16.8 16.2 | 32369 35827 40170 44685 38263 | 18.6 18.4 18.4 18.2 18.4 |
| 1986/87 1987/88 1988/89 | 267965 299235 342317 | 45053 54712 67595 | 16.8 18.3 19.8 | 48632 52577 57094 | 18.2 17.6 16.7 |
Source: From 1974/75 ABS 5206.0 June Q. 1989
Earlier years, 5207.0 May 1989
(a) Gross National Expenditure equals total national expenditure on goods and services.
(b) Private capital expenditure equals gross fixed capital expenditure including expenditure on dwellings and real estate transfer expenses.
(c) Public consumption equals government recurrent expenditure on goods and services.
Table 14: Gross Investment: Main Sources of Finance
| Year To June | GFCE (a) $m | Depreciation (b) | Net New Capital Inflow (c) | Domestic Savine | |||
| $m | % of GFCE | $m | % of GFCE | $m | % of GFCE | ||
| 1970/71 1971/72 1972/73 1973/74 Average | 9131 10113 10996 12930 10793 | 4540 5156 5823 6872 5598 | 49.7 51.0 53.0 53.2 51.9 | 507 77 -1013 556 32 | 5.5 0.7 -9.2 4.3 0.3 | 4084 4880 6186 5502 5163 | 44.7 48.3 56.3 42.6 47.8 |
| 1974/75 1975/76 1976/77 1977/78 Average | 15138 18387 20955 22566 19262 | 8905 10752 12450 14176 11571 | 58.8 58.5 59.4 62.8 60.1 | 947 848 1886 2412 1523 | 6.3 4.6 9.0 10.7 7.9 | 5286 6787 6619 5978 6168 | 34.9 36.9 31.6 26.5 32.0 |
| 1978/79 1979/80 1980/81 1981/82 Average | 25933 28783 35176 41437 32832 | 15906 18296 21094 24181 19869 | 61.3 63.6 60.0 58.4 60.5 | 2958 1196 4845 8754 4438 | 11.4 4.2 13.8 21.1 13.5 | 7069 9291 9237 8502 8525 | 27.3 32.3 26.3 20.5 26.0 |
| 1982/83 1983/84 1984/85 1985/86 Average | 41035 44225 50961 59218 48860 | 27721 30096 32797 37649 32066 | 67.6 68.1 64.4 63.6 65.6 | 7012 7017 10822 14554 9851 | 17.1 15.9 21.2 24.6 20.2 | 6302 7112 7342 7015 6943 | 15.4 16.1 14.4 11.9 14.2 |
| 1986/87 1987/88 1988/89 (d) | 63991 72131 85720 | 42560 46567 49694 | 66.5 64.6 58.0 | 12831 11210 17018 | 20.1 15.5 19.9 | 8600 14354 19008 | 13.4 19.9 22.2 |
(a) ABS 5206.0 June Quarter 1989 & 5207.0 May 1989. Figures for gross fixed capital expenditure include expenditure on dwellings and real estate transfers.
(b) ABS 5206.0 March Quarter 1989 for 1984/85 to March 1989. ABS 5221.0 for earlier years.
(c) ABS 5303.0 1986/87 for 1974/75-84/85,5302.0 March Quarter & June Quarter 1989 for 1985/86-88/89 & 5303 1986/87 & 5305.0 1987/88 for 1970/71-1973/74.
Net capital inflow from overseas is the current account deficit excluding the undistributed income of foreign investment in Australia and of Australian investment abroad.
(d) Year ended March.
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