Debt binge bad taste for PM

[act2617]

Debt binge bad taste for PM
By Ross Gittins
March 4, 2006

WHAT terribly poor taste for foreign debt to raise its ugly head during the Howard Government's 10th anniversary celebrations, just when everyone's saying what a wonderful job John Howard's done of managing the economy.

Whoops. This week we learnt that the net foreign debt had reached $473 billion by the end of December. That's almost 2½ times the $193 billion it was when Mr Howard came to office in March 1996 promising to fix Labor's irresponsible foreign debt.

Measured more sensibly, it's gone from 38 per cent of gross domestic product to 51 per cent.

The foreign debt grows, as we find ways to finance the gaping deficit on the current account of the balance of payments. And that's the cause: continuing large current account deficits ? particularly over the past year or two.

In the December quarter, the current account deficit jumped to $14.4 billion, equivalent to 6.1 per cent of GDP for the quarter.

For the full calendar year the deficit was $55.1 billion, composed of the trade deficit of $19.4 billion and the "net income deficit" of a whopping $35.2 billion (plus odds and sods worth $500 million).

The net income deficit represents the net interest we pay on the net foreign debt, plus the net dividends we pay to foreign owners of Australian businesses. (It's "net" because it's what we owe foreigners, less what they owe us.)

The net income deficit for last year was up 23 per cent on 2004. It accounts for almost two-thirds of the current account deficit.

Here's the thing: the current account deficit is up ? for the quarter and the year ? not because of a worsening trade deficit, but because of a big rise in interest and dividend payments to foreign creditors and investors.

Why is it up? Three reasons. First because, when you run bigger current account deficits, you have to borrow more from foreigners and then pay more interest.

Second, after the onset of the mild world recession of 2001, the central banks of the US and Europe cut official interest rates to very low levels. Now they are putting rates up to normal levels and our interest bill is growing rapidly.

And finally, because a high proportion of mining companies are foreign owned, a high proportion of profit flows overseas.

Mineral prices are so high at the moment that our terms of trade ? what we get for our exports relative to what we pay for our imports ? are the most favourable for 31 years.

Hence the criticism that to have such a high current account deficit is a very poor performance.

It's a fair point. But the high proportion of mining profit going overseas is one reason better terms of trade haven't improved the current account as much as expected.

Also, increased income from resource exports is spent on imports. The little improvement in the trade deficit ? and there's been none since the June quarter ? is owed entirely to the higher prices for commodity exports.

Over the past calendar year, the value of exports was up 17 per cent, whereas the value of imports rose only 8 per cent.

An increase in the value of exports or imports can be explained by an increase in prices or quantity or a combination.

It turns out that the 17 per cent increase in the value of our exports is explained by a price rise of 15 per cent and a rise in volume of less than 2 per cent. And an 8 per cent increase in the value of imports is explained by price rises of less than 2 per cent and a 6 per cent increase in volume.

From this, you can see that any improvement in the trade deficit over the course of the past year is more than fully explained by higher commodity prices. If you look at volumes, it shows a continuing underlying deterioration in our trade position: the volume of imports rose by 6 per cent-plus, whereas the volume of exports rose by less than 2 per cent.

[muppet]

John howard said the other night on the telly that he had been in power for so long because the australian people could smell BS a mile away and that he was a strait talker. I think that is funny because everything that comes out of his mouth is BS. How come when something goes wrong no one knows what is going on . Dont we pay these people to know whats going on I thought that was their job. If I dont do my job I get the sack if they dont do theirs they get a pay rise. Some body vote these morons out before costello ends up beeing PM.

[phat_stak_tipa]

mate labour is worse dont worry i think every government is stuffed so just get on with life and except it jeez mark latham may have been PM and look what a goose he is

[turboute]

The problem is there is no decent person / party that would actually do better. Labour tends to bow to minorities and go on spending sprees - the democrats could organise a ИИИИ up in a brewery and I would hate to see what the greens would do if they ever got in power (no more steak for dinner).

[Casper]

lets not even go here guys. Political threads targeting individuals or parties are against site rules due to massive flame wars in the past.