Sunday, August 10, 2008

It doesn't take much to tip the balance

For over 25 years, Australia has been buying more overseas than it sells.  This excess spending is known as the balance of payments current account deficit.

By the first quarter of this year, the difference between what we bought from foreigners and what we sold had blown out to the equivalent of seven per cent of national income.  In other words, for every dollar we earned, we spent an extra seven cents.

There are only two ways this can be done:  we either sell off assets or borrow.

The world as a whole has to be in balance in its spending and production.  For every dollar nations like Australia borrow, somebody is lending a dollar or buying a dollar's worth of our assets.

Fortunately, Australia has a host of assets to sell in terms of mining and agricultural resources.  We have been selling these and borrowing from overseas.  Though our foreign debt is not a serious issue, it has reached around three quarters of national income or some $25,000 per head of population.

So who is doing the saving to provide Australia's borrowings?

Well part of it comes from oil rich countries who are salting away some of their "sit-down" money for a rainy day.  China and India are also savers and lenders.  This is ironical since it means we are borrowing to supplement our present lifestyle from people who are far poorer than us.

Over the past couple of months the persistent trend of Australians spending more on imports of goods and services than on exports has been reversed.  Suddenly we are now earning more than we spend -- the current account of the balance of payments is in surplus.

This is due to a number of factors.

Not the least of these is the escalating prices that our exports of minerals and rural products are fetching on world markets.  Since the beginning of 2004, the average price of our exports has increased by 35 per cent more than the average price of our imports.  Again, China and India are riding to the rescue with their booming economies.

A stable economy and general confidence that government interference will be low has made Australia a competitive venue investment.  This has raised all our living standards.

However there is nothing inevitable about Australia being able to benefit from market opportunities.

Our reputation has been painstakingly gained but it can be destroyed very rapidly.

Ominously in this respect, the Rudd ascendency has created a whirlwind of policy initiatives.  Many of these hark back to a past distrust of markets and free enterprise on which most Labor politicians cut their teeth.  We have seen subsidies for car manufacturing, price watch procedures on groceries and petrol and talk of resurrecting union power.  We have seen water being taken from irrigators and, above all, massive business uncertainty being created as a result of foreshadowed carbon taxes. 

All this activity will come to haunt us if, as many anticipate, Australia is facing an economic downturn.  In that event if a current account surplus is maintained it will be because consumer and business demand has flagged and not because of our export competitiveness.


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