Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

My question is to Senator Minchin, the Minister for Finance and Administration, representing the Treasurer. I refer to the release today of Australia’s December current account figures, showing a significant increase in the quarterly deficit to $14.4 billion, up from $13.7 billion. At the same time, Australia’s net foreign debt has reached record highs of $473 billion, up $52 billion in one year alone. Given these debts are increasing at a time of record mineral export prices, when will the government even acknowledge that there is a problem and a significant increasing risk to Australia’s economy and take action to stabilise the debt and hopefully reduce its escalation?

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

As always, I welcome Labor questions on the economy. At least it indicates that they are focusing on the main game. We welcome discussion of Australia’s current account position, although I note that as the Labor Party stares down the barrel of 10 years in opposition it still pains them to remember the campaign of 1996. However, there is a very big difference between 1996 and now in relation to Australia’s economic position. I will first refer to the point that Senator Sherry made, which is the release today of the balance of payments figures.

The current account deficit has widened to $14.4 billion in the December quarter, but there is some good news hidden in those figures. The deficit on goods and services rose by just one per cent. The deficit in relation to goods actually fell by four per cent, or $177 million, and the improvement in the trade balance in relation to goods which occurred in the December quarter was driven by a six per cent rise in exports during the quarter. What is going on in relation to the trade in goods and services must reflect what is going on in the resources sector of the economy—to wit, the imports of capital goods were up 24 per cent, reflecting the very strong investment under way in the Australian economy to generate the powerful resources exports which we are doing.

I also draw Senator Sherry’s attention to another document released today—the ABARE release on Australian commodities, which forecasts commodity exports rising by seven per cent in the next financial year to a new Australian record of $134 billion. The value of iron ore exports is expected to rise by 26 per cent next year, LNG exports are to be up by 22 per cent and farm exports are also forecast to rise.

The real point about the Australian current account—as I am sure Senator Sherry knows—is that it reflects the difference between investment and savings. This country has always relied on—and will continue to rely on for a very long time—foreign investment to ensure that its economy continues to sustain the sort of growth that we need and want. What matters is the capacity to service those investments. Given the trade performance, the current account is really reflecting that strong investment inflow and, by definition, the outflow to foreign investors.

Indeed, there is an interesting quirk in this whole measure of the current account and the outflow. The RBA has pointed out that a large proportion of the earnings of companies in Australia that would, by definition, be payable back to foreign investors are in fact retained by those Australian companies. They are not paid out as dividends but the accounting treatment still classifies them as an income flow to offshore investors.

When examining Australia’s current account, one must take account of the fact that it is driven largely by the difference between investment and savings and that the investment reflects foreign investors’ confidence in Australia. The worst thing that could possibly happen to the Australian economy is any diminution in that confidence of foreign investors in Australia. That is the thing to fear—that, for some reason, foreigners lose their enthusiasm for investing in this country. By definition, foreign investment involves an outflow of earnings by those foreign investors, which is reflected in the current account.

As to foreign debt, I think the most important point to make is the difference between now and 1996, and that is that virtually none of that is reflected in the public sector contribution. All that debt is private sector debt. Having paid off the government debt that we were left, there is no government contribution to that total of foreign debt. The debt servicing ratio now is around nine per cent compared to the peak under Labor of 20 per cent. (Time expired)

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

Mr President, I ask a supplementary question. Given the record Australian high net foreign debt—whether it is public or private, it is still all net foreign debt and at a record high—has now reached more than half the total value of Australia’s gross domestic product, which is the recognised danger zone of adverse international reaction, when will the government take urgent policy action to minimise the growth risk to Australia’s economy?

Nick Minchin (SA, Liberal Party, Minister for Finance and Administration) Share this | Link to this | Hansard source

This is just ridiculous scaremongering by the Labor Party. If Senator Sherry is talking about international confidence in the Australian economy, I would refer him to last year’s IMF article IV report, which noted that Australia’s vulnerability to adverse external shocks remains low and:

… the economy remains well placed to manage adverse external shocks.

Standard and Poor’s noted in May last year:

The very strong financial position of the public sector mitigates the effects of the high external debt. We also take comfort that the country’s foreign exchange exposures are adequately managed.

I repeat that the debt servicing ratio—which is what matters; that is, can you service the debt?—is now nine per cent and it was 20 per cent under the former Labor government.