Australia has received two recent warnings over its debt levels – one from Standard & Poor’s (S&P) and the other from the International Monetary Fund (IMF).
S&P has warned that Australia’s net foreign debt has reached “extreme” levels, among the worst in the world.
John Chambers, the chairman of the firm’s sovereign ratings committee, told The Australian (October 10, 2016): “Australia would have one of the weakest external positions of the 130 sovereigns that we rate.”
He suggested that the federal government risked losing its AAA rating if it continued to miss its fiscal targets. This followed S&P’s decision in July to put Australia on “negative outlook”.
The government has about $50 billion allocated to infrastructure projects.
Australia’s net foreign debt has risen sharply since the deregulation of the financial system began in the early 1980s. It rose from around 15 per cent of the economy (gross domestic product) in 1984, to 55 per cent in 2014, to around 64 per cent today.
Almost three-quarters of the net foreign debt is held by the private sector, with only one-quarter held by governments.
The recent sharp rise followed the end of the mining boom, which saw major falls in the loss of foreign revenue as minerals export prices declined sharply.
Mr Chambers also warned that the rapid rise in Australia’s property market was comparable to, but not as pronounced, as the surge in Spain’s unproductive property investment not long ago. He pointed out that after Spain’s property market crashed, government debt went from near zero to 80 per cent of annual economic output. (Brisbane Times, October 6, 2016)
The government borrowed to boost the economy and pay a burgeoning welfare bill.
The IMF has also issued a warning to Australia. It warned that, following the global financial crisis (GFC) of 2008, Australia was one of a small number of countries in which debt had increased rather than increased.
It said that after the GFC, government debt in advanced countries rose rapidly, while private-sector debt began falling in 2012. The exceptions to falling private debt were Australia, Canada and Singapore, where debt rose substantially.
More broadly, the IMF said that the global debt in the non-finance sector – held by governments, non-finance firms and households – was now a staggering 225 per cent of the total world economy, or $A199 trillion. Households and non-finance firms hold two-thirds of this global debt.
This private sector debt brings significant risks when it reaches excessive levels, more so than government debt.
The IMF said that the world continued to face slow global growth. This set the stage for a “vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown”. These warning suggest that Australia could see a rise in the cost of foreign borrowing should it loses its AAA rating.
Continuing slow growth in the global economy impedes the Australian economy, while staggering global debt levels create instability on world markets.
Australia faces these risks at the same time that it has a high level of workers underemployed or unemployed (consistently around 18-20 per cent since 2012, according to Morgan Research). At the same time, the technological revolution is destroying more jobs than it is creating, adding to the government’s welfare bill.
As pointed out in the last News Weekly (October 8, 2016), Australia’s unemployed and underemployed constitute the 22 per cent of those no longer voting for a major political party.
The question is, how does the government boost the economy, create jobs and reduce unemployment, underemployment and welfare dependency? The temptation is for the federal government to make cuts, or delay expenditure, in easy areas of the budget like infrastructure.
The government has about $50 billion allocated to infrastructure projects. Rather than fund infrastructure out of the federal budget, it should create either a development bank or an infrastructure finance corporation. Such a body can raise (or create) its own funds for low-interest, long-term investment.
Infrastructure investment creates jobs. It has a big multiplier effect throughout the economy and reduces demand for unemployment welfare.
Superannuation funds are reluctant to build but keen to buy and manage major infrastructure projects. That would keep those investments in Australian hands, providing returns to Australian workers.
Infrastructure is the foundation of private enterprise. The better our infrastructure, the better our private companies can operate and capitalise on the technological revolution.
A development bank or infrastructure finance corporation would replace the need for federal and state governments to use taxpayer funds for such investments. Such an agency would allow the government to could cut its budget expenditure by $50 billion, free up funds either to reduce the federal deficit, or to invest in education, families and health.
An infrastructure finance corporation is a win-win for governments, super funds and Australian workers in a world where the global risks to the Australian economy remain high.
 “IMF singles out Australia as global debt levels hit $US152 trillion”, Brisbane Times, 6 October, 2016.
 “The economics behind political unrest”, by Patrick J. Byrne, News Weekly, October 8, 2016.