The Organisation for Economic Growth and Development which groups the main industrialised countries issued grim news for Australia this week.It used usual economic jargon to portray the bad news. It said the tightening of monetary and fiscal policy would not be enough to contain inflationary pressures and the current account deficit. In simple terms, we have lived on the international credit card too long and the steps the Government has taken are not enough to fix the problem. In the past, Australian Governments have frequently blamed international conditions for economic maladies at home. This time it cannot. The OECD says nearly all other nations are doing well. It might be slightly galling for some Australians to see New Zealand doing better than Australia at the Rugby World Cup, but it is of greater hurt to see that that Australian Governments did not have the fortitude of New Zealand Governments to make the hard decisions in the past decade that now enable New Zealanders to say they are doing better economically than Australia _ having cut their overseas debt and reduced unemployment at the same time keeping inflation reasonably low. Australia has kept inflation low, but foreign debt remains dangerously high. It was this element of Australian economy that caused the OECD to sound the alarm bell.
The Minister for Trade, Senator Bob McMullan, has rightly warned that the foreign debt cannot be turned around quickly; that investment decisions take time to come through; that capital imports are needed to give rise to import replacement. However, this is all the more reason to get good policy in place quickly so those slow processes can begin.
The OECD suggested that interest rates policy and the Government’s Budget were not enough to deal with foreign debt. Australia’s experience in the 1980s verifies the former proposition and perhaps the way the Budget surplus was engineered verifies the latter. Selling off assets does not reduce underlying government spending.
The OECD was concerned that the Australian economy did not have much slack left which could be taken up in the boom side of the cycle to claw back the current account deficit and the foreign debt. The slackness would normally be in idle capital and labour. The trouble for Australia is twofold. There is little or no idle capital around, either in cash or equipment _ the more so as the Qantas float and other government sales will suck in domestic capital to prop up government spending. Capital equipment will have to be imported, worsening the debt problem. Secondly, government policies make it too difficult for employers to take up the excess in labour. Just this week, the Australian Chamber of Commerce reported that employers were reluctant to employ full-timers because of difficulty with the unfair-dismissal laws. Other regulations are also impediments to employment: payroll tax, excessive occupational health and safety regimes and inflexible awards. Governments must address these things as well as other inefficiencies like the tax system if Australia is to defeat its chronic current account deficit problem.
Otherwise the debt will keep piling up until international investor confidence collapses. Unfortunately for Australia, while the accumulation of debt and the process of dealing with it once accumulated are relatively slow, market response can be quite sudden, irrational and impulsive.