Thursday, April 28, 2011

Essay on Debt

Essay on Debt

Good morning ladies and gentlemen. Today I will be speaking to you on a topic that many Australians believe the government should start taking a lot more seriously. Our foreign debt.

Australia's level of foreign debt is a key economic indicator and one which is widely quoted in the media today. But before we get into what the problems dealing with this issue we must first define exactly what it is, and how it is calculated.

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Foreign debt or commonly referred to as external debt can in simple terms be described as the amount of money owed to overseas countries by groups in an economy. There are three main ways of measuring a countries foreign debt. Gross foreign debt is the total amount owed by Australians to overseas lenders. Net foreign debt is equal to gross foreign debt minus amounts of money that overseas investors owe Australia. This figure gives a better indication of Australia's debt situation as it takes in account what we are owed ourselves. The last, and probably most accurate measure, can be calculated my taking the Net Foreign Debt as a percentage of our Gross Domestic Product.

According to the Australian Bureau of Statistics latest figures, Australia's net foreign debt for the September quarter stood at $300.7b or 45.6% of the Gross Domestic Product, up nearly 16%, on the same time the previous year. This is the equivalent of about $16,000 for every man, woman and child in the country. In comparison to other countries, foreign debt in the US represents only around 20 per cent of GDP. Australia's level of debt has grown at a steady rate since the early 1990's. However a slump in business investment in this last quarter, a fall of 5.2% in private capital expenditure, a key factor in calculating economic growth, and a falling exchange rate, has set economic alarm bells ringing.

The main cause of Australia's foreign debt is the large Current Account deficits we ring up each year. In the 1980's, when our foreign debt increased seven-fold our current account deficits were largely cause by out excessive levels of spending on imports. But main cause of Australia's Current Account deficits in the 1990's have been the huge amount of interest to be paid on the foreign debt that already exists. Australia had to borrow more money from overseas just to keep up with these interest payments. This has created a vicious circle of debt that we are now trapped in.

Most of Australia's foreign debt is owed by companies and governments, and they are responsible for paying it off. We as consumers owe very little of the foreign debt, but even so, it dramatically affects every one of us. In the late 1980's and early 1990's Australians had their first taste of the serious effects of foreign debt. In the late 1980's our Current Account deficit was rising so quickly that the government decided that it was imperative that they take action. The method chosen by the government to use was the monetary policy to boost interest rates. When interest rates are high consumers are discouraged from borrowing money to spend on imports. But these high interest rates also put a lot of consumers and businesses heavily into debt. As a result, they cut back their spending, not only on imports but on locally made products as well. With spending down, suppliers began laying off workers and cutting production and soon the country was in the grips of a recession, with close to one million people unemployed.

Economists have different theories about how to solve out Foreign Debt crisis. However it is widely accepted that Australia must reduce its Current Account deficits, and try to turn them into Current Account surpluses. But achieving Current Account surpluses is more easily said than done. To succeed, Australia needs to boost exports and reduce our imports. The government is following this theory through a group of policies called microeconomic reforms. These policies are targeted at boosting efficiency in Australian businesses, which would in turn reduce the cost of producing goods and services. This would make Australian exports more competitive on the world market and give local industries and edge over imports.

Another approach, and the one which I personally believe is the answer to our crisis, is to encourage Australian households to save more. Currently the government charges us on all deposits into accounts. With our huge foreign debt, why are we being slugged for putting money away? The government should be introducing tax breaks for those who can save a certain amount of money each year. Maybe then people will not spend all of the money that comes into their pockets. All these savings would make it much easier for Australian firms to borrow money locally rather than having to seek it overseas.

The disheartening thing about these facts, is that unlike a country such as Japan, here in Australia we have enormous natural resources, enormous agricultural capacity and we have an educated and experienced workforce. We produce more of everything than we need, more wheat, more beef, more coal, more timber, and more steel. Other countries should be indebted to us and the fact that we are so far in debt when we live in a land so plentiful is a terrible indictment on successive governments.

We need to re-educate Australians such as you and I to save instead of borrow and also to concentrate on the efficient industries of Australia. If we can stop thinking of the present and instead think of the future of Australia, foreign debt can be controlled.

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