This was published 14 years ago
Why Barnaby Joyce is creating much ado about nothing on foreign debt
By Ross Gittins
It has become deeply unfashionable to talk about Australia's foreign debt. Neither the government nor the opposition wants to mention it and the same goes for most economists.
Predictably, however, the subject holds no terror for Barnaby Joyce. As best I can make out, his celebrated mention of ''our net debt gross public and private'' was a reference to our foreign debt.
What's that you say? You thought the pollies had done little else but spar about deficits and debt? Sorry, different debt. They have been arguing about the public debt - the amount the federal government owes (mainly to Australians).
On the latest estimates (which are probably too high), the federal budget's return to deficit is projected to cause the net public debt to peak at $153 billion in June 2014, before falling back.
According to Bureau of Statistics figures last week, in December Australia's net foreign debt reached $648 billion. And if you enjoy a good worry, as Joyce clearly does, why not quote the gross foreign debt? It stands at a cool $1219 billion. How on earth did we get to owe so much? Just who owes it? What is the difference between gross and net? And why does no one but Bushwhacked Barnaby think there is much to get excited about?
Each quarter, the cost of our imports usually exceeds the receipts from our exports, leaving us with a trade deficit. As well, we have to pay interest and dividends to foreigners. When you put the two together you are left with a deficit on the ''current account'' of the balance of payments, which in the December quarter was $18 billion.
That deficit has to be covered by borrowing from foreigners or by foreigners investing in the ownership of Australian businesses. Mainly it is debt.
Since we have run a deficit on the current account almost every year since the year dot, and since we also have to borrow to cover the interest we pay on earlier debt, our total debt to foreigners is $1219 billion.
Fortunately, it is not quite that bad. That is the gross amount we owe. But while some Australians were borrowing from foreigners, others (mainly our super funds) were lending to foreigners. As at December, foreigners owed us $571 billion.
So that is why the net amount we owe to foreigners is $648 billion and that is the more meaningful figure on which to focus.
Don't jump to the conclusion that the government owes all our foreign debt. The Australian economy owes the money. As it happens, the public sector - federal and state - owes only only 10 per cent of the $648 billion net foreign debt. The private sector - particularly our banks - owe the rest.
The net foreign debt has increased by $59 billion while Kevin Rudd has been in power, which is enough to explain why it is not a subject the government wants to talk about.
But it increased by more than $396 billion during the 11 years that John Howard was in power - which explains why no one in the opposition, bar Joyce, thinks it a good subject over which to attack the government.
To be fair, however, all their economic advisers would have been telling the pollies the foreign debt was not a great concern. Why not? Well, for a start, because Australia has always been a ''capital-importing country''.
We have always had more opportunities for economic development than Australians have been able to afford to exploit. Investment has to be funded by savings, but Australians have never saved enough to finance all the investment projects we would like to be getting on with, so we have always invited foreigners to bring their savings to Australia and participate in the development of our economy.
And when you are a capital-importing country - that is, when you run a surplus on the capital account of the balance of payments - it follows that you run an offsetting deficit on the current account, allowing you to perpetually import more than you export.
This has been true for a century and more. But with the world's move to floating currencies and integrated financial markets, it has been possible for the current account deficits of investment-destination countries like us - and the current account surpluses of savings-supplying countries like Japan and China - to be a lot bigger than they used to be, thus leading to more rapid growth in the foreign debt.
But how can we be sure the huge growth in our foreign debt in the noughties has been caused by our increased investment rather our increased consumption (which would support the fears of people who worry that we are living beyond our means)?
When you check, you see that our national savings as a proportion of gross domestic product is as high as it has always been, whereas national investment is a lot higher than average, mainly because of the mining investment boom. So we can be confident we will have the earnings to serve the additional debt.
As for the fear of a sudden big fall in our dollar, we have seen it plunge to US50¢ a few times, and learnt it does not do much damage.
Of course, the conventional wisdom among economists could be wrong. It has been known.