The country was once again able to use a portion of its budget surplus to reduce its outstanding debt. During the 1990s, when budget deficits were the norm, the government used the budget surplus to pay down the debt. As the government had a budget surplus, that was an extra payment to reduce the debt. By the 2000s, the government was operating with a budget deficit and was in the process of issuing debt, and so needed to run a budget surplus in order to have an extra payment to put towards reducing the debt. So that was not possible anymore. And in the 1990s we were using one trillion dollars a year to pay down the debt. And in the 2000s, we are looking at around a trillion and a half dollars a year to pay down the debt.
Now, when you have a debt problem of around 170 percent of GDP, it’s going to hurt. There’s no question. So you are going to have to go down the austerity road. A lot of people were concerned in the 1990s that we were going to take a path where you are constantly borrowing, and at the same time you are getting to an unsustainable level of debt. That was one of the arguments for why we had the Maastricht Treaty in the 1990s, because a high debt is not sustainable over time. But we ended up with a country that became less productive as a consequence of having been at that high level of debt. So the concern was the debt itself was a problem.
But when you have a debt problem of around 170 percent, it’s going to hurt. There’s no question. So you are going to have to go down the austerity road.
In that environment of a huge increase in debt during the 1990s, the worry was about the debt, not about the impact on growth or on productivity.
And the impact on growth and on productivity was actually much greater. So by getting out of that debt trap, we went from being a lower growth, lower productivity economy in the 1990s and 2000s to one that was growing quite fast and now has become one of the fastest growing, strongest growth emerging economies.
But here is a key point, when you look at the impact of debt. This is a chart of the country’s current account balance, the difference between what the United States is bringing in from abroad, what it is spending and borrowing. And this is how we have been getting to be in this position of a large and growing debt relative to GDP.
Here you can see that as long as we had the boom in the late 1990s and early 2000s, we were running large deficits in the last five or six years. The country’s current account deficit as a percentage of GDP, which is what we are running, has risen dramatically, and it is now larger than it has been in over 30 years.
And what’s happened in recent years is we’ve seen the surge in productivity, we’ve seen the surge in growth, we’ve seen the surge in exports, which has driven the demand for foreign exchange. And that has been good for our current account balance. That is the story we have to tell.
Now if you go back to the 1990s and early 2000s, what you saw was a big increase in the current account deficit as a percentage of GDP. Because we were borrowing very rapidly in those years. So for instance, in the early to mid-1990s, we were running a current account deficit of around 5 percent of GDP. But by 2002, it was over 6 percent. And we have been at this level ever since, of a current account deficit of about 6 or 7 percent of GDP.
You have a problem when you go from being an economy where you are borrowing at a reasonably good rate, at a rate that is, by international standards, fairly accommodative, you go from that to having deficits that are, by international standards, a source of concern.
And of course, for many, many countries, not just the OECD, but for developing countries like ours, the current account deficit has to be managed by some combination of internal devaluation, a rebalancing of savings from the domestic economy to the external economy, which can only happen if the exchange rate appreciates. And the reason why is, it is the only way that you get the savings from the domestic economy to be able to reallocate to the external economy.
We can’t do that if the exchange rate is appreciating.
You asked how we came to this point. I have a short answer for you: we came to this point in the way in which we came to this point was as a result of the mismanagement by the Howard government of the exchange rate and the fiscal position in the wake of the global financial crisis.
That is, at the time that they implemented their package of macro-economic policy measures to restore growth, their package consisted essentially of the fiscal stimulus, the tax cuts, the increase in government spending.
It was of course the right package; it was the stimulus that was required in the wake of the global financial crisis to restore growth and to rebalance growth towards consumption. And that we achieved, as did other advanced economies; other OECD economies achieved. But they only did so because of the measures that the Howard government implemented.
And what that meant, with the fiscal stimulus, the fiscal packages that were put in place, was the exchange rate went from A$0.50 in mid-2002 to A$0.95 in mid-2006, and that the fiscal package that had been put in place in Australia in late 2007, the fiscal stimulus that we were given was one of a scale that far exceeded the capacity of our economy to absorb it, and this is one of the reasons that Australia experienced a recession and a financial crisis.
There were a range of things that happened in Australia, the biggest of which were the interest rate hikes that were put in place in mid-2008, which of course put even more pressure on the exchange rate.
And then with the global financial crisis that began in 2008, there were various shocks and surprises that were delivered to the Australian economy as a result of those interest rate rises and the collapse of housing prices.
It is one of the things that the government can be criticised for over the last three or four years, since about 2011-2012, is that they have become quite myopic on the issue of fiscal policy.
As this discussion has occurred over the past couple of days, I can also see that they are not prepared to make the necessary changes to the fiscal policy architecture that is necessary to make sure that we do not see another episode like the one that we had in 2008.
The main point I am going to make about that is that Australia’s capacity to absorb fiscal stimulus is still an issue that we are facing. In fact, I would argue that the fiscal stimulus that we have just received has resulted in more than the average capacity of our economy. We saw in fact a temporary reduction in capacity.
One of the problems that we have in Australia is that, when we are in a downturn, businesses are reluctant to spend.
In fact, it has been argued that that may be one of the reasons that we are experiencing a downturn now because businesses are reluctant to spend.
They may not spend because they don’t have confidence in the future or they do not have confidence in the Government to manage the economy and they don’t believe that there is a government policy of fiscal stimulus.
When it comes to the Government, however, this is where the Government has lost credibility. There is no credibility.
The Government cannot do anything to restore the faith of business in Government when the Government itself is not prepared to spend to stimulate the economy.
The main point is that we do not need to do an across-the-board cut.
The Government has made the case that we do need to cut expenditure to stimulate the economy.
Indeed, the Government’s case is pretty strong.
In fact, I have heard quite a few economists say that we need to reduce expenditure in every area to stimulate the economy.
They say that the problem is not that there are excessive government spending.
The problem is that the government is not spending.
It is spending far too much.
For more details about how tax debt deduction could work for you, call (888)489-4889 for a free consultation.