Friday, May 12, 2006

An economics question

Michael Costello: Taking us down with them | News | The Australian

In the article above, Laborite Michael Costello criticises the budget because:

First and foremost, there is no strategy to rein in the current account deficit, which is running regularly at more than 6 per cent of gross domestic product and which has led to a national debt of about $500billion, still rocketing upwards. That's $23,000 for every man, woman and child in Australia.

He then quickly moves on to talk about skills shortage and training not being addressed.

Hang on, back to the current account deficit. This is all to do with private sector debt and import/export imblances, isn't it? Everyone acknowledges that there is no government debt now. Quite the opposite.

My question is: what are the possible government strategies to deal with large private sector debt, and our fondness for overseas goods?

It seems to me that this is an issue much raised on the Labor side, but (as in Costello's column) with virtually nothing said about how the government could tackle it.

OK, I know that Ken Davidson in The Age had a whole column about this, in which he wrote:

Given the unprecedented size of the foreign debt, a prudent government would measure every proposed expenditure and revenue initiative in the budget against its impact on net exports (exports less imports) in order to minimise the size of the current account deficit, which has to be financed by foreign borrowings.

But no, the Government is sticking with its discredited "twin deficits" thesis, to the effect that eventually budget surpluses, which add to national savings, will be reflected in current account surpluses.

It seems to me that this is not really an answer at all. There is no detail as to what expenditure and revenue measures could be taken to improve the current account deficit. I am guessing that this means that there is no magic cure; it would likely be a very tough nut for any governing party to crack.

Am I wrong?

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