FOREWORD
A draft of this paper was presented at the Autumn Forum of the Economic Society (Victorian Branch) in May 1987. The present version has been revised to take account of comments received on the draft, to update the statistics and to take account of some other developments since then. A shorter version of this paper has been published in the ACC/Westpac Economic Discussion Papers series under the title Australia's Debt Problem -- How Serious?
The author is significantly indebted to Geoff Carmody for assistance in the preparation of this paper and to a number of other colleagues who were kind enough to take the time to provide comments on the draft. The views expressed herein are, however, entirely his responsibility.
Richard J. Wood
"... I think in this context the observed fiscal profligacy of the federal government is only one symptom of a more inclusive and pervasive characteristic of our age which is reflected, also, in the large and growing private debt, in the low rate of domestic savings and in many, many other aspects of modern life.
We seem to have raised the effective discount rate that regulates our behaviour. By contrast with the Victorians ... who acted as if they were going to live always ... we seem hell bent on acting as if there is no tomorrow. The effects on the growth of our capital stock, and I include the physical, but I include the moral and social capital stock here, ... are easy to predict."
[Extract from comments by Professor James Buchanan at a
Conference in the United States on 19 November 1986, on
"Financing Economic Growth: How Much Debt, How Much Equity?"]
INTRODUCTION AND OVERVIEW
Over recent years Australians have heard a lot about the increase in overseas debt. But are the full implications of the increase widely understood? How serious is Australia's debt problem? This paper seeks to provide a perspective against which to assess the significance of the increase in external debt. Unless the causes of the increase are fully understood and fully explained to the Australian community, it may be difficult to achieve the adjustments needed to overcome the problem.
It is relevant that overseas borrowings are mostly undertaken by governments or businesses. The average person finds it difficult to feel personal concern when told, for example, that with gross overseas debt estimated at almost $112 billion at December 1987, each household in Australia owes indirectly close to $19,500 and has indirectly to pay overseas around $1,500 per annum in interest; he is even less likely to feel personal concern about the fact that the net external debt to GDP ratio rose from 6 per cent in 1980/81 to around 31 per cent in 1987.
It is also relevant that part of the increase in average living standards over the period since 1982/83 (1) has been made possible by the increase in borrowings i.e. Australians have supplemented their incomes by borrowing to finance additional expenditure. It is only the fall in living standards over the past 12-18 months, reflecting the cut back in the rate of overseas borrowing, that has started to bring home the fact that the debt problem now requires us to effect a large increase in domestic savings and to limit our consumption -- unless, that is, there is a marked improvement in productivity or in the terms of trade.
The stark reality is that the proportion of our current receipts now required to service liabilities to foreigners is at or close to previous historical danger points (2) -- danger points in the sense that the previous reaching of those proportions tended to be followed by economic depression. Our external debt ratios have, moreover, gone past the early warning points used by international private sector financial institutions to frame their lending policies and are now in the danger area.
While history does not necessarily repeat itself, these signals are thus clearly flashing red and clearly pointing to the need to reduce debt ratios not simply to stabilise them. That probably requires that the current account deficit be reduced below 2.5 per cent of GDP. (3) Yet that deficit is still running at an annual rate of close to 4 per cent of GDP, debt ratios are continuing to increase, and they are likely to increase further in 1988/89 even if overseas economic growth holds up.
Debt ratios are also high and/or rising in a considerable number of overseas countries. That situation is not confined, moreover, 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 recent 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. (4)
The existence of a widespread trend involving increasing debt ratios must raise serious concerns about the sustainability of even the reduced rates of overseas economic growth that have been experienced in recent years. The relevance of this for Australia is that, to the extent that our increased external debt leaves us highly geared, we are exposed not only to the normal consequences of a sudden drop in export income in the event that a world recession or depression does occur but to the need to take sharp corrective action in unfavourable circumstances.
Australia has got into this situation because, for the past 15 years or so, we have been increasing our borrowings 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 reflected in increased 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 really matters 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, financed increased consumption. As a result, Australians have incurred a lot more debt but have not commensurately increased the productive assets needed to service that debt (which explains the increasing proportion of incomes going on debt servicing). Moreover, an increasing proportion of investment has been for replacement of "worn out" capital rather than expanded productive capacity and some of the investment that has been financed by borrowing has not produced satisfactory returns.
Per Cent to GDP
| Consumption (a) | Gross Investment (b) | Gross Debt | ||
| Total (c) | External | |||
| Av 1970/71 to 73/74 | 72.8 | 17.5 | 123 | 10 |
| Av 1974/75 to 77/78 | 76.6 | 17.1 | 114 | 9 |
| Av 1978/79 to 8l/82 | 78.4 | 18.1 | 126 | 15 |
| Av 1982/83 to 85/86 | 78.8 | 17.7 | 149 | 33 |
| 1986/87 (est) | 77.9 | 18.3 | 158 | 40 |
(a) Private plus government. Includes consumption of capital.
(b) Excluding investment in dwellings (and real estate transfer expenses) and stocks.
(c) Excluding all debt of financial institutions i.e. is understated to the extent of borrowings by financial institutions from overseas.
Australians must accept the responsibility for the rapid increase in debt in recent years. While the external economic environment has generally been unfavourable, reflecting a variety of factors, we have to adjust to unfavourable changes in that environment. In any event, our terms of trade really only started to fall early in 1985 (5) and both internal and external debt were increasing faster than GDP well before that. The downturn in our terms of trade between early 1985 and late 1986 only brought forward the need to make the necessary adjustments. We should also keep in mind that a fall in commodity prices relative to prices for other goods may 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.
We have reached a situation where debt levels constitute a serious problem. They not only expose us to a high risk of a financial crisis, or a series of mini crises, but they may be operating to inhibit both investment and consumption. 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.
HOW DEBT SHOULD BE ASSESSED
THE NATURE OF DEBT
In 1958 Professor James Buchanan set out the basic principles by which debt should be analysed. (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 is accepted, then 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. For the private borrower that 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. Even so, if government policies inappropriately encourage a sufficient number of individuals to "splurge" there will then be adverse implications for the economy as a whole. 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. (7) That fact led Buchanan to the view that, because of the obvious potential 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.
Another conclusion from Buchanan's analysis is that, if the burden of internal debt is on future generations, then so too must the burden of external debt. Of course, external debt service has to be met in foreign exchange but that should not in itself impose any additional burden (8) apart from any constraints that may exist on shifting resources into the traded goods sector. It seems to follow that, unless the real level of domestic and external interest rates differs, it matters much less whether we borrow internally or externally than whether any borrowings are used productively so that the burden of providing the lender with a future income stream is capable of being met.
Another way of looking at the question of internal versus external debt burdens is to point out that the attempts to differentiate are essentially based on an argument that internal debt can't be a burden because we owe it to ourselves and it all nets out. But why draw the line at a national border? In world terms there would be zero net debt and, on that argument, there can't be a debt problem.
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.
But it is of course 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 (Chart 7) -- or both -- than Australia. Moreover, there are no signs that overseas lenders are likely to stop offering further foreign currency loans or even that they will stop buying $A denominated securities. (9) Yet by indicating an objective of reducing the current account deficit and stabilising the external debt/GDP ratio the Government has recognised that there is a point beyond which it would be inappropriate to continue borrowing overseas. (10) What, then, determines the limit to debt, either in total or external?
Chart 7: Gross External Debt -- 1986
| Rank | Country | Debt as a Multiple of Export Earnings |
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 | DANGEROUSLY HIGH COUNTRIES Bolivia Argentina Peru Brazil Poland Mexico Chile Ecuador Egypt Nigeria Uruguay Morocco Philippines Zaire Venezuela Honduras New Zealand Jamaica Costa Rica Ghana Hungary Ivory Coast Indonesia Turkey India Israel Australia Pakistan Greece Guatemala Sri Lanka Denmark Algeria | 6.6 5.0 4.8 4.3 4.2 4.2 4.1 3.9 3.5 3.4 3.2 3.2 3.2 3.1 3.0 3.0 2.9 2.9 2.9 2.8 2.8 2.6 2.6 2.6 2.6 2.5 2.4 2.3 2.3 2.3 2.2 2.2 2.1 |
34 35 36 37 38 39 | HIGH DEBT COUNTRIES Colombia Tunisia Dominican Republic Portugal Jordan Zimbabwe | 2.0 2.0 2.0 1.8 1.7 1.7 |
40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 | LOW DEBT COUNTRIES Finland Thailand Ireland Gabon Malawi Yugoslavia Canada Norway United States Bulgaria Iceland East Germany Sweden Soviet Union Korea Trinidad & Tobago Romania South Africa Panama Oman China Italy Czechoslovakia Japan United Kingdom Spain Germany Belgium Switzerland Saudi Arabia France Austria Hong Kong Taiwan Kuwait Netherlands Singapore | 1.6 1.5 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.3 1.3 1.3 1.2 1.2 1.2 1.1 1.1 1.0 1.0 0.9 0.9 0.8 0.7 0.7 0.7 0.7 0.6 0.4 0.4 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.1 |
Source of debt ratios: Morgan Guaranty, (Classifications of countries is based on internationally accepted warning points and is not from Morgan Guaranty).
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 thus 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. 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 monetising 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 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. Obviously, such a situation is not readily identifiable. But there can be little doubt that, in Australia's case, 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 (see Chart 21) -- 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. (11) However, the longer term effects of such action, particularly on business investment, could scarcely have been favourable.
Clearly it would be desirable to try to avoid such situations i.e. where governments are forced to take last minute action to avoid a financial crisis with, at the very least, adverse effects on business confidence. In fact, a primary objective should be to deal with excess debt problems not by last minute measures to restrain spending but by measures which are taken early enough and which prevent excess debt problems emerging by increasing production and income. Given the time lags involved, that requires, however, that governments receive and act on early warning signals.
SOME EARLY WARNING SIGNALS
The question arises, therefore, as to the appropriate early warning signals. The following points seem relevant:-
Total Debt/GDP and Total Debt Servicing/GDP Ratios.
While an upward trend in such ratios provides a warning signal, it seems unlikely that any particular ratio of total debt to GDP, or total debt servicing to GDP, will signal that a problem exists or is in sight. 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.
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 prima facie 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.
It is particularly important to consider 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.
External Debt
The key litmus test here is 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 current receipts, there is a significant probability that a recession/depression will ensue (Chart 16), 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 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 (Chart 6);
- 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 (Chart 15);
- 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.
While these (and other) ratios do not provide any hard and fast rules signalling the need to change policies, they clearly provide important guidance. Trends in such ratios for Australia are contained in the attached charts and are discussed further below.
GROSS OR NET?
There is 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 net debt and the net servicing cost i.e. to take account of all or some of the assets, and the income earned thereon, that represent an offset to the liabilities represented by the debt. For example, investment in overseas countries by Australian companies has been significantly higher in the 1980s than the 1970s and the assets that have been acquired should be regarded as a partial offset to the increase in overseas borrowings between those two periods. However, while it may thus seem necessary to have regard primarily to net debt, this is by no means clear cut.
In the first place, it needs to be recognised that the concept of net debt normally used is a relatively limited one. The assets that are counted as offsets to gross debt are only financial assets, viz holdings of overseas countries' financial securities and fixed interest loans to non residents, and take no account of "real" assets that may be held overseas. Thus, there could be a change in net debt that could have no effect on the capacity to service gross debt i.e. simply as a result of a change in the mix of assets as between real and financial. Moreover, while the offsetting of financial but not real assets against gross debt may be justified on liquidity grounds, it has no other obvious basis. Indeed, just at the time when it becomes more difficult to service gross debt, the return on financial assets could also become more uncertain. (12)
There is also the point that, if the concept of net debt were pursued to its logical conclusion, there would probably be no (or even negative) net debt, i.e. if all assets, both financial and real were taken into account, they could, subject to the method of valuation of assets, exceed or equal gross debt. That would imply that a debt problem could not exist. Such an approach would, however, simply paper over the potential for a problem. Thus, in circumstances where the economy was slowing or in recession, the value of the offsetting assets could start to decline and could stop yielding income: but there would not necessarily have been any advance signal of possible trouble, as would be the case if gross debt trends are examined.
Therefore, while it is necessary to have regard to trends in net debt, particularly for the sectors (government, corporate and household), the most important indicators to watch would seem to be gross debt/debt servicing trends.
AUSTRALIA'S DEBT SITUATION ASSESSED
The attached series of charts 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 debt has been rising faster than GDP since about 1975/76 and that process has speeded up since the early 1980s (Charts 1-3). The speeding up mainly reflects increases in private rather than public sector debt, although total State sector debt grew faster than private sector debt. The faster trend 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.
An important factor in the more rapid rise in private sector debt/GDP ratios since the early 1980s has been the relatively greater resort to debt, as opposed to other forms of finance, by the business sector. Although accurate figures are not available for corporate sector debt, increases in total private sector debt and in corporate debt servicing ratios (13) suggest that the gearing of the business sector has continued to increase through to 1986/87. Moreover, as both total liabilities and debt of the private sector have increased much faster than GDP, the overall exposure of the business sector to a downturn or slow down in national income appears to have increased substantially. (14) Investment may also be inhibited by this increased gearing.
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 will 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 (Chart 4). Although this does not reflect an increase in borrowings by the Commonwealth Government, it does include a major component for government authorities. In fact, since the early 1980s the public sector's total external borrowings have increased at about the same rate as the private sector's: of total gross external debt of about $112 billion at end December 1987, some 45 per cent represented public sector debt, the same proportion as at 30 June 1981. Further, although comprehensive data is not available, the maturity of external debt has clearly shortened considerably in recent years. (15) There has, however, been some diminution of exposure to exchange rate changes. The proportion of externally held debt denominated in $A has increased from 15 per cent at 30 June 1981 to 23 per cent at 30 June 1986. At the latter date, nearly one half of external debt was denominated in $US.
While our gross external debt ratio is below that for many other countries (see Chart 7), in terms 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 the red light (gross external debt reaching 200 per cent and the current account deficit exceeding 30 per cent of exports of goods and services) has been showing since 1985 (see Chart 6). 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.
Another way of looking at the emergence of the external debt problem is to compare the gap between national spending and income. (16) Chart 25 shows that that gap was widening from the early 1980s until 1986/87, when the sharp tightening in monetary policy resulted in the very slight real increase in national spending being slower than the small real growth in national income.
DEBT SERVICING RATIOS
A better guide to potential and actual debt problems may 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 Charts 10 to 14 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 35 per cent of companies' net operating surplus in the mid-1970s to around 55 per cent in 1985/86 and 1986/87. 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.
For households, servicing/income ratios have also increased quite sharply and interest on consumer debt and dwelling debt have both contributed to this (Chart 11). Personal bankruptcies (including individuals owning unincorporated businesses) have been growing strongly as has the number of mortgage payments in arrears (Chart 12).
The increase in the external debt servicing ratios have, however, been the most marked (Charts 15 and 16) and the historical danger point of total gross property income payable abroad at 25 per cent of current receipts was reached in 1986/87. Using criteria adopted by the international banks, interest payments on gross external debt passed the 15 per cent of exports warning point in 1985 and reached danger point in 1987.
USE OF DEBT
As indicated, a key question in assessing increases in debt ratios is how the increase has been spent. Drawing on the table in the introductory section, it is clear that the increase in our external debt has almost entirely gone on consumer rather than investment spending (17) (see also Chart 17). Between the early 1970s and the mid 1980s total consumption spending increased from 73 per cent of GDP to around 79 per cent while gross fixed investment excluding investment in dwellings scarcely changed. Over the same period total debt increased from 123 to almost 160 per cent of GDP, 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 and this has, it can be argued, "crowded out" private investment (Chart 18). 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 welfare payments, has discouraged saving and work by individuals. Although debate has generally revolved around the net disincentive effects of the high taxation needed to finance the additional expenditure, it is in reality the interaction of the combined effects of higher taxation and increased welfare 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 been financed by increased government borrowing (see Chart 9). Quite apart from the resultant direct increase in debt, there has been 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.
It is also relevant that, of the gross investment in fixed capital that has been occurring, an increasing proportion has been replacement investment rather than additions to the capital stock. Chart 19 shows that the proportion of investment "financed" by consumption of fixed capital has increased from around 60 per cent in the early 1970s to more than 70 per cent in 1986/87. As pointed out in EPAC Paper No 10, (18) the slower growth in investment than in GDP has been accompanied by a rising trend in unemployment, i.e. the capital stock has grown insufficiently to allow increases in the potential work force to be employed. As that paper put it "The slowdown in capital stock growth over the past decade means that Australia's productive potential and ability to respond to economic stimuli (for example, the depreciation of the $A) are reduced, as is the ability of the economy to sustain full employment in the short run. Moreover, to the extent that technological progress is embodied in new capital equipment Australia may be falling behind its major foreign competitors."
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 some recovery since then, it has been small.
Profitability is still well down on early 1970s levels (see Chart 20). Equally, investment can scarcely have been encouraged by wage costs that have increased at rates that have consistently undermined Australia's international competitive position (see Chart 22).
CONCLUSION
The main conclusion is clear: Australians have incurred a lot more debt but have not commensurately increased the productive capacity needed to service that debt; we have been on a consumption "binge". It is also clear that, judged by a number of criteria, albeit containing subjective elements, Australia's external debt ratios have been clearly too high since at least 1984 -- and they remain much too high. In short, the Government's objective must be not merely to stabilise those ratios even at existing levels, let alone higher levels, but to reduce them.
This is necessary simply to avert the risk of a financial crisis or even a series of mini-crises involving bouts of currency instability and continued uncertainty about whether economic policy settings are adequate to prevent another mini-crisis: if Australia is perceived as sitting constantly on a knife edge that will not provide an environment conducive to sustained and strong economic growth. But the issue goes beyond the avoidance of crises: we should have an environment that provides positive attractions for investment. In practice, however, we not only have low profitability but debt levels -- and debt servicing levels -- that are inhibiting investment and, possibly, consumption. Looked at in terms of the net picture it may not seem that increased debt can in itself have such inhibiting effects, given that increased debt and debt servicing is matched by increased assets and income from lending in the hands of the lenders. But lenders are not necessarily investors in physical assets. Moreover, if increased debt levels are not matched by increased servicing capacity, entrepreneurs will be deterred from undertaking additional real investment (19) and concerns will start to be raised about default possibilities. Confidence can become undermined fairly quickly in these circumstances. Something like this process may have been a factor in the 1930s depression, which was preceded by a large increase in debt. (20)
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 gap widened, with the growth in income tending to slow relative to the growth in spending? (see Chart 25).
Government spokesmen have attributed almost the whole debt problem to what they describe 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 (Chart 24). Calculations have been made purporting to show what the current account deficit would have been if there had been no change in the terms of trade since early in 1985. (21)
Such calculations implicitly assume, however, that policy changes would have been made as they have in fact been made since early 1985. This is extremely unlikely: indeed it is probable that a good deal of the macro policy tightening since early 1985 would either not have occurred in the absence of the fall in the terms of trade or would have been implemented later. (22) But without such policy tightening the current account deficit, while not perhaps reaching the 6 per cent of GDP level it deteriorated to in 1985/86, would have continued at excessive levels.
More importantly, both total and external debt ratios were increasing well before early 1985 and, as the Industries Assistance Commission noted in its 1986/87 Annual Report, "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". (23) The recent fall in the terms of trade can thus be regarded less as the cause of our problems and more in the nature of bringing forward the need to recognise that inappropriate policies have been pursued.
Essentially, then, 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 polices 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. Directly or indirectly, governments -- especially Federal Governments -- must shoulder the lion's share of the responsibility for our debt problem. (24)
This assessment is, of course, made with the benefit of hindsight. However, there were a few who, while not necessarily perceiving all the implications at the time, consistently advised governments throughout the period against the pursuit of many of the policies actually adopted by them. (25)
SHOULD EXTERNAL BORROWING HAVE BEEN CONTROLLED?
Before considering those policies it is necessary to address two frequently adduced, if somewhat conflicting, arguments, viz, that, as over one half of the increase in external debt since 1981 is due to private sector borrowing overseas (mainly by business), 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 overseas.
The key point here is that it is not the overseas borrowing per se that has caused the excess of spending on imports over exports that has been reflected in Australia's current account deficit. 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, required that Australia, as a nation, increase its borrowings overseas. (26) 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 borrowed more overseas or overseas residents would have invested more in securities domiciled in Australia (including $A denominated government securities) i.e. the amount of debt owing to foreigners would not have changed.
This raises a question as to the reasons for restrictions on overseas borrowing by public authorities, i.e. given that the key issue would appear to be the total amount of borrowing by such authorities, there would seem little substantive case for restricting authoritiesi overseas borrowing per se. A similar point might be made with regard to the amount of overseas borrowing by the Commonwealth Government, including the extent to which the Commonwealth should finance its overseas budget deficit by such borrowing.
The substantive issues involved in this question cannot be pursued in this paper except to note that they relate primarily to the management of monetary and exchange rate policy and, in particular, to the extent to which the Government should take a position on whether the current account deficit should be reflected in either domestic interest rates or the exchange rate. There is also, however, the not unimportant point that "large" overseas borrowings by governments, being perceived as having no adverse implications for domestic interest or inflation rates, may encourage politicians to spend and borrow more in total than they otherwise would and to undertake projects that are of dubious national economic benefit. This argues for continuing to limit overseas borrowings by public authorities and for the Commonwealth Government itself being no more than a moderate borrower overseas.
We turn now to consider the government policies that have caused Australia's excess debt problem.
INCREASED GOVERNMENT SPENDING
Since the early 1970s the relative share of national resources taken by government has increased by about 35 per cent. (27) This increase has not only added to aggregate demand/ spending but has done 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¢ 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 even greater. (28) 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 half 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. These various developments are reflected in Chart 18, which shows the very large growth in public consumption and which suggests that that growth can be viewed as having "crowded out" private investment.
But the expanded Welfare State may not only have reduced the incentive to save and work. It has almost certainly 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, net annual public sector borrowings averaged about 2.8 per cent of GDP and, in the five years to 1973/74, the average was just over 2 per cent per annum. Since then, the average has been 4.8 per cent per annum and in no year prior to 1987/88 have net public sector borrowings (PSBR) been less than 3 per cent of GDP (29) (see Chart 9) i.e. part of the increase in government spending has been financed by governments avoiding the hard decisions to increase taxes/charges or to improve the efficiency of public authorities. Given that 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. In fact, particularly in circumstances where the government has been both reducing the incentive and the capacity to save of the private sector there is a sound case for the government itself to become a net saver; (30) in a sense, the government ought to make up the savings that would have been undertaken by individuals if social welfare, etc had not reduced individuals' perceived need and capacities to do so.
The sharp jump in net public sector borrowings after 1981/82 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 net public sector borrowings 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, (31) wages growth continued well above that for our major international competitors and the overseas current account deficit increased from an already high 4 per cent of GDP in 1982/83 to around 6 per cent in 1985/86. That, in turn, has led to a series of substantial depreciations in the $A, totalling around one-third, since early 1985. In short, this continued expansionary fiscal policy has played a major role in the increase in our overseas debt and the resultant problems we now face.
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, monetary policy unchanged, an expansion in borrowings (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 draw on overseas savings. Thus, the increase in the PSBR since 1981/82 has broadly been mirrored in an expansion in the current account deficit (see Chart 9), leading to the so-called "twin deficits" problem and the massive expansion in overseas debt.
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 and that economic considerations have received insufficient weight. 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 (Chart 22). This has required continuing downward adjustments in the exchange rate, which has added directly to the $A value of external debt denominated in foreign currencies and to the $A servicing cost of such debt.
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 Conciliation and Arbitration Commission has adopted a compromise approach to the prevention and settlement of industrial disputes and has paid scant 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 greatest weight to the resolution of disputes. 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 greater wage moderation. Equally, those circumstances suggest that the accord reached between the present Government and the unions was not helpful at that time and contributed to the far too slow a pace of real wage reductions.
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 after 1981/82 had a firmer line been taken on unions' claims. Moreover, while falling real unit labour costs undoubtedly contributed to the growth in employment since 1982/83, that increase has very largely gone into consumer service jobs of various types and is thus importantly due to 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 present levels will depend on the capacity of the tradeable goods sector to provide additional employment.
As to "flexibility", while small 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 (Chart 22). 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 many cases, become entrenched in awards by the arbitration authorities.
Moreover, while the accord has "delivered" in the sense of allowing reductions in real wages, the benefits of this in terms of lowering costs have been at least partly offset by the continued high growth in government spending/taxation i.e. the alleged trade-off of reducing real wages in return for increasing the social wage via government welfare etc has not been a costless exercise if viewed in aggregate terms. This is rarely acknowledged.
But the excessive increase in wage costs (which reflects changes in 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 some recent recovery, it remains lower than the early 1970s levels (see Chart 20). Further, 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 -- that has also occurred since the mid 1970s. (32) These wage outbreaks, and other inflexibilities in the system (such as in awards for juvenile wages), have also undoubtedly contributed directly to the large increase in unemployment 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 in fixed investment relative to GDP, and the resultant slower growth in the capital stock as well as (both directly and indirectly) the rise in unemployment. 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, 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. Judged on that basis one must conclude that monetary policy has also failed. (33) In short, given other policy failures, monetary policy needed to have been tighter and interest rates higher so as to reduce borrowing and spending to a rate consistent with income growth.
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 appears to have happened (see Chart 3).
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. The increase in private sector gearing, especially at a time when public sector gearing and total external gearing were increasing, raises serious doubts about the adequacy of monetary policy during this period. (34)
This is not to suggest that monetary policy should have been (or should now be) 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 (see Chart 23), suggests that such effects may be overstated. 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 a combination of inflation and exchange rate consequences, to allow interest rates to rise to restrain excess spending. But the political sensitivities inherent in using monetary policy as the major weapon to control spending has 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. (35) 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 (see Chart 21) 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. It is apparent that the stance of monetary policy has come to be adjusted more and more for short term political purposes, including even State elections. One longer-term result of all this may have been to raise the level of real interest rates unnecessarily. Moreover, such stop go policy changes can scarcely have been conducive to creating a favourable environment for business planning and investment.
The most recent easing of monetary policy since a few months before the 1987 Federal election is a worrying development in this regard as is the continued faster-than-GDP growth in private sector debt. Notwithstanding the large estimated reduction in the PSBR in 1987/88, these trends risk a resumption of excessive growth in domestic spending and a return to a deteriorating external account. That would then start another round of interest rate increases, reduced private sector spending, etc.
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 undoubtedly been conducive to industry restructuring. Further, the comparative freedom of capital to flow into and out of Australia, subject only to the relatively moderate (and diminishing), restrictions on inward 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. (36) 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 Government placing undue reliance on the exchange rate as the adjustment mechanism. In fact, it was not really until 1986 that the Government began to recognise that continuing depreciations in the exchange rate, or the threat thereof, carried the potential to have serious adverse implications for the preparedness of investors to undertake real let alone financial investment. (37) Yet without adequate real investment, a sustained improvement in the underlying external debt situation is unlikely to be achieved unless domestic spending and living standards are heavily restrained.
SUPPLY SIDE DEFECTS
The other "blade" of the debt gap "scissors" (i.e. apart from excess spending) has been inadequate 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 make an overall assessment of changes in government policies affecting the supply side since the early 1970s, it seems clear 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 recent 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. As has been suggested, the enormous expansion in public consumption can be seen as having "crowded out" private investment (Chart 18), this being reflected in turn in an inadequate growth in the capital stock and rising 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 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. For example, in the five years 1981/82 to 1985/86 whereas private trading enterprises had a net rate of return (38) on capital of 12 per cent, the net rate of return of public trading enterprises was less than 2 per cent. 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 over 70 per cent of the public sector is unionised while only 34 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 notes, the provision of "positive assistance" by the Government may in fact have been detracting from economic performance.
Another 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 validity in terms of tax policy, there are 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 probably 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.
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. Two points need to be made in regard to this claim.
First, 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 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 in the direction of strengthening the centralised nature of the system by increasing the powers and role of the Conciliation and Arbitration Commission and, through amalgamation of trade unions, by strengthening the bargaining powers 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. It would also be essential to reduce union powers in order to limit the scope for wage "break outs" spreading across the economy. However, the prevention of excessive wage increases would still require pursuit of firm fiscal and monetary policies, of course.
In terms of reducing the imbalance between spending and incomes, a good start has been made in reducing the public sector's draw on savings. However, the progressive easing in monetary policy since a few months before the last election is scarcely a move in the right direction. Although some of this easing has been to avert short term upwards pressures on the exchange rate that appear to have been judged unacceptable, the fact remains that the extent of the easing implies, on past experience, a substantial stimulus to domestic spending. (39) While the 19 October fall in share values may have partly offset that stimulus, there remains a considerable risk that domestic consumption spending will grow too strongly, thereby reversing or at least halting the improving trend in the current account and restarting the cycle of currency instability, interest rate increases, and reduced domestic spending -- and continuing the trend of low business investment. It is relevant that the recent reductions in the current account deficit have largely reflected improvements in the terms of trade, not restraint in spending.
The second point to make regarding the "moving in the right direction" claim is that the pace of change has been far too gradual and recent suggestions that living standards cannot be reduced further suggest that the pace may slow further. 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 threatens to condemn 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. The risk of a recession is considerably enhanced by the excessive level of our external debt and the uncertain overseas economic outlook, including the high risk of a recession in the United States. The risk of slowing overseas growth should have been foreseen given that Government spokesmen have (correctly) criticised, over the last 2-3 years, the continuing failure of the US to take adequate corrective action to reduce the Federal Budget deficit: 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 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 has, regrettably, slowed the pace of adjustment in 1987/88 so that the external account is now likely to contribute to GDP growth considerably less than even the budget forecast of 1 percentage point and much less than last year's 2.3 percentage points.
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) 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 (40) and inflation will continue to move increasing proportions of the working population into the still-high tax brackets. In fact unless there are tax "cuts", by 1990 "bracket creep" will have driven the top marginal rate to the point where it applies to a person on only 1.1 times average earnings.
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.
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. (41)
Any reduction in the real overall burden of taxation requires, of course, a reduction in the size of government. The first significant step in that direction has been taken in 1987/88, when public sector outlays may fall to under 41 per cent of GDP from just over 42 per cent in 1986/87. But there is a long way to go. Once the public sector has ceased to be a net borrower -- a move that should have top priority -- further reductions in government expenditure can and should be used to finance a lower overall burden of taxation.
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 little in the way of action that will 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. There is also far too much "fence-sitting" by those who accept the need for major change but who are reluctant to fully engage the debate because they fear being labelled politically: what we require is leadership from all major non-political groups, including businessmen, academics and bureaucrats, in the long run national interest. But, above all, we need the Government to provide the community with a realistic assessment of the difficulties we face and to implement the policies to overcome those difficulties.
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 three percentage points of GDP annually to around 31 per cent;
- after allowing for the elimination of the net public sector borrowing requirement (from its present level of around two per cent of GDP), a broadly commensurate reduction in taxation;
- the restructuring of the income tax system on the basis of a single rate of personal income tax;
- the establishment of a wage negotiation system that allows/encourages agreements providing for a substantial increase 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;
- pending an improvement in productivity, policies which exercise heavy restraint on consumption spending. To the extent that other policies do not ensure this, monetary policies 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 great our difficulties are. The worst is far from 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.
ENDNOTES
1. Although average real earnings fell by about 7 per cent between 1982/83 and 1986/87, more comprehensive measures of living standards show an increase over this period. For example, real household disposable income per capita rose by over 7 per cent and total consumption expenditure per capita by over 5.5 per cent. In 1986/87, however, there was a fall in real household disposable income per capita of 2.2 per cent and real consumption expenditure per capita increased by only 0.7 per cent.
2. In a paper presented at a Seminar on Debt in September 1987, Professor Boris Schedvin suggested that, on the basis of historical experience, 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. Gross property income payable abroad reached around 27 per cent of current receipts in 1986/87.
3. The extent to which the current account deficit would have to be reduced below 2.5 per cent per annum in order to achieve a reduction in the external debt/GDP ratio depends on a number of factors. However, assuming a constant exchange rate and growth in nominal GDP of 5 per cent per annum, it would need a deficit of 1.4 per cent of GDP just to stabilise the debt/GDP ratio at the current level of around 31 per cent. A faster growth in GDP would allow a higher current account deficit to achieve stability and the Treasurer has suggested stability could be achieved with a current account deficit of 2.8 per cent of GDP. However, a growth in GDP faster than 5 per cent per annum would imply higher inflation in Australia than overseas, leading to depreciations and higher debt and debt servicing.
4. See World Debt Tables, External Debt of Developing Countries, 1987/88 Edition. The report states that in the 1980s per capita incomes of highly indebted middle-income countries have 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 analysing 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.
5. Chart 24 shows that between the September quarter of 1977 and the December quarter of 1984 there was virtually no change in the terms of trade. The 1986/87 Annual Report of the Industries Assistance Commission pointed out that "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."
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 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. 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. While this possibility cannot be ruled out, it seems inherently unlikely and the trend in private sector saving seems not to support it.
8. Some may argue that the fact that debt is external must add a dimension to the debt problem. In one sense, that is true because the existence of large external debt is likely to mean higher total debt than otherwise. But the key question is whether external borrowings per se necessarily add to the problem. 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, therefore, constitute a net addition to the servicing cost of any given level of total debt as there is a higher private income stream to service the debt. Of course, the net position of the economy will depend on how the external borrowings are employed. But that also applies to internal borrowing. It is whether or not the additional resources obtained by the borrower are used productively that determines whether or not the external borrowing adds to the debt problem, not the borrowing per se. There will of course be differences between the nominal interest cost of borrowing domestically and overseas, 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.
9. Of course, the cost of borrowing has tended to increase e.g. the downgrading in the Australian Government's credit rating in the New York market in 1986 may have added 0.125 to 0.25 per cent to the cost of $US borrowing overseas. There has also been a widening in the differential between domestic interest rates and interest rates in some major financial markets overseas.
10. The Government itself has not indicated a particular level which it regards as appropriate for stabilising the external debt/GDP ratio although EPAC has prepared projections of stabilisation ratios that should be achievable. 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" contains a revised scenario with debt stabilising at 34 per cent of GDP and the current account deficit at 2.6 per cent.
11. Notwithstanding the temporary nature of the increases from mid 1986 to early 1987, as can be seen from Chart 23 they were sharp. It is little short of remarkable that the Government was able to implement what was an old fashioned "credit squeeze" and escape much of the blame for it by using the terms of trade excuse.
12. For example, if there is an overseas recession, interest rates overseas will tend to fall (although this will also help with debt servicing).
13. Interest payments by the corporate sector have been growing much faster than GDP and than net operating surplus (see Chart 13). Reserve Bank Bulletin Supplements on Company Finance show that, between 1981 and 1985, corporate debt to equity ratios increased from 0.98 to 1.14.
14. It may also be argued that the faster rise in private sector debt than in other liabilities does not necessarily represent the true picture given that other liabilities are recorded at book value. If equity was valued at market values, it may be that debt would be shown to have grown more slowly than other liabilities. However, as the fall in equity values on 19 October shows, there are hazards in taking market values.
15. In 1981, 10 per cent of foreign debt domiciled abroad (which constitutes about 90 per cent of total externally held debt) had a definite maturity period of less than one year. In 1987 almost 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 12.1 per cent in 1986 (see ABS 5305.0 1985/86 Table 41).
16. 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.
17. This is not to say that some external borrowings have not been used to finance investment: they obviously have.
18. "Business Investment and the Capital Stock", January 1986
19. An increase in servicing ratios should, of course, lead businesses and individuals to respond by improving efficiency, working harder, etc, so as to increase net income. However, the extent to which this occurs will depend on other disincentives and/or barriers inhibiting such responses, including the return on investment.
20. In his Shann Memorial Lecture of 15 September 1987 the Governor of the Reserve Bank argued that there are some important differences between our present situation and that existing prior to the 1930s depression. He referred, inter alia, to the facts that net debt is now around one third of GDP whereas it was over one half then and that a much greater proportion of it is debt of the private sector. He also acknowledged, however, that net interest payments on overseas debt are around the levels of the late 1920s and that there are other similarities, including a slowing world economy.
21. See, for example, ABS 5302.0 Balance of Payments December Quarter 1986 which presented calculations that show 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 is less than half the recorded outcome of $14,499 million.
22. Even then it was the adverse reaction of financial markets that forced much of the policy tightening.
23. Page 52 of the Industries Assistance Commission Annual Report, 1987.
24. The main exception to this generalisation is the largely appropriate macroeconomic policies pursued in the initial period of the Fraser Government.
25. The full story of advice provided by institutions such as the Commonwealth Treasury and the Reserve Bank during this period is, regrettably, unlikely ever to be told.
26. Of course, such policies did include "loose" monetary policies which gave too much encouragement to borrowing in general.
27. From around 31 per cent to about 42 per cent of GDP (although 1987/88 estimates suggest this could drop back to just over 40 per cent.)
28. See, for example, Edgar K Browning "On The Marginal Welfare Cost of Taxation" in the American Economic Review, March 1987.
29. However, the estimates for 1987/88 suggest that, excluding major asset sales, the PSBR could fall to just over 2 per cent. The 4.8 per cent average does not include this estimate.
30. 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.
31. To an important extent this doubtless reflected the surplus "pool" of labour available from the rise in unemployment to 10 per cent following the wages "outbreak" of 1981/82.
32. 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.
33. 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, of course, lagged.
34. For some time, the Federal Reserve Board in the USA has included private sector debt movements on its list of monetary aggregates that are closely watched.
35. Since the abandonment of monetary targeting in January 1985, the monetary authorities have 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 involves a "judgmental or pragmatic approach to the setting of monetary policy."
36. There was a period during the late 1970s/early 1980s when there was a purported policy to try 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.
37. A policy of allowing continuing rapid depreciation would, in due course, have led Australia down the Latin American track of high inflation and the associated economic and political instability.
38. Ratio of net operating surplus to net capital stock excluding land, financial assets and stocks.
39. See, for example, Dr Ed Shann's article in Business Review Weekly for 29 January 1988. He suggests that "on past history, the current yield curve would cause demand to rise by 3-4 per cent at least."
40. Notwithstanding the personal income tax reductions, the overall burden of taxation in 1987/88 is likely to be higher than the previous peak in 1986/87.
41. 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
CHARTS
Chart 1: Aggregate Gross Debt as % of GDP
Source: ABS Cat 5206.0 (March 88), RBA Bulletin Dec 1987
(1) Includes both domestic and external debt
Chart 2: Gross Public Sector Debt as % of GDP
Source: RBA Bulletin Dec 1987, ABS Cat 5206.0 (March 88)
Chart 3: Gross Private Sector Liabilities (1)
Source: ABS Cat 5206.0 (March 88), RBA Bulletin Dec 1987
(1) Business and Household Sectors
(2) Non-Debt Liabilities, Domestic Share Raisings & Corporate Equity Investment from Overseas
Chart 4: Gross External Debt as % of GDP (1)
Source: ABS Cat 5304.0 (March 88), RBA Bulletin Dec 1987, Round Up (April 1984)
(1) Prior to 1980 coverage was less comprehensive
Chart 5: External Liabilities (1) (2) as % of GDP
Source: RBA Bulletin Dec 1987, ABS Cat 5304.0 (March 88)
(1) Borrowing plus corporate equities
(2) Public and private sectors
Chart 6: Debt as % of Exports of Goods and Services
Source: ABS Cat 5206.0 (March 88), ABS Cat 5304.0 (March 88), RBA Bulletin Dec 1987
(1) "Warning" and "Danger" points are those commonly used by international private sector lending institutions as a bais for their lending policies to countries. The warning and danger points shown here relate to gross external debt.
Chart 8: Total and External Gross Debt as % of GDP
Source: ABS Cat 5206.0 (March 88), ABS Cat 5204.0 (March 88), RBA Bulletin Dec 1987
Chart 9: The Twin Deficits
Source: ABS Cat 5206.0, 5501.0, 5303.0 (March 88), The Round Up (March 88), RBA Unpublished Data.
Figures for 1987/88 are forecasts
Chart 10: Public Sector -- Gross Debt Servicing
Source: ABS Cat 5206.0 (March 88), May 87 (Corrigendum), ABS Unpublished Data.
Chart 11: Household Interest
Source: ABS Cat 5206.0 (March 1988), ABS Unpublished Data.
Chart 12: Bankruptcies and Home Loan Insurance Default Claims
Source: Attorney General's Department, Housing Loans Insurance Corporation Annual Reports
(1) Housing Loans Insurance Corporation
Chart 13: Private Corporate Enterprises (1) Debt Servicing Ratios
Source: ABS Cat 5204.0 (May 87), National Income & Expenditure 1986/87.
(1) Excludes Financial Enterprises
(2) Gross Operating Surplus less consumption of fixed capital
Chart 14: Financial Enterprises Sector (1) -- Receipts Left After Paying Interest (2)
Source: ABS Cat 5204.0 (May 87), National Income & Expenditure 1986/87
(1) Includes Public Financial Enterprises
(2) "Receipts" as defined by the ABS is net operating surplus plus property income. The lower the proportion the less is available particularly for dividends and retention by enterprises
Chart 15: Gross External Debt Servicing: Interest Payable as % of Exports of Goods and Services
Source: ABS Cat 5206.0 (March 88), ABS 5304.0 (March 88), RBA Bulletin Dec 87
(1) "Warning" and "Danger" points are those commonly used by international private sector lending institutions as a bais for their lending policies to countries.
Chart 16: External Liabilities -- Historical Servicing Ratio (1) (1861-1987)
Source: Professor Boris Schedvin (Oct 1987)
(1) The ratio of property income payable overseas to total current account credits
Chart 17: Rising Consumption -- Stagnant Investment (1)
Source: ABS Cat 5206.0 (March 88), ABS Unpublished Data
(1) Percentages calculated on four yearly averages except 1987
(2) Private and government consumption expenditure
(3) Public and private
Chart 18: The Main Switch: Public Consumption Displaces Private Investment
Source: ABS Cat 5206.0 (March 88)
Percentages calculated are four year averages except 1986/87
Chart 19: Gross Investment (1) -- Main Sources of Finance
Source: ABS Cat 5206.0 (March 88), 5201.0 (March 87), ABS Unpublished Data
(1) Gross investment covers private and public fixed capital
Percentages calculated are four year averages except 1986/87
Chart 20: Expected and Required Rates of Return on Capital (1)
Source: EPAC
(1) For investment in new capital to proceed the expecetd return should exceed the yield that can be obtained on low risk financial assets by a margin
(2) Expected rate of profit on the existing capital stock
(3) Depends on real interest rate, capital depreciation and rates of corporate taxation
Chart 21: Indicators of Monetary Policy (1)
Source: RBA Bulletin Jan 1988, Dec 1987, June 1985, Dec 1984
(1) When the Official Cash Rate is higher than the ten year Treasury Bond Rate, monetary policy is relatively "tight"
Chart 22: Australia's International Competitiveness -- The Losing Battle
Source: The Round Up and Commonwealth Treasury
(1) The ratio of unit labour costs/GDP deflator in the Australian economy to the weighted aveage of the exchange rate adjusted unit labour cost/GDP deflators of Australia's four major import sources
Chart 23: Nominal and Real Interest (1) Rates
Source: RBA Occasional Paper No 8A Australian Economic Statistics. 1987/88 is forecast
(1) Average interest rate on bank overdraft
Chart 24: Terms of Trade
Source: ABS Cat 5206.0 (March 88)
Chart 25: Australia's Growing National Spending Cap (1)
Source: ABS Cat 5206.0 (March 88), ABS Unpublished Data
(1) Spending Gap represents net borrowing from overseas
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