Download trends in australia`s trade and the balance of

TRENDS IN
AUSTRALIA’S TRADE
AND THE BALANCE OF
PAYMENTS
TIM RILEY
Director
Economic Literacy Centre
and
Tim Riley Publications Pty Ltd
HSC Economics Day
Thursday June 21st 2012
THE UNIVERSITY OF WOLLONGONG
Trends in Australiaʼs Trade and the Balance of Payments
1
Consecutive mining booms have had a major effect on Australia’s balance of
payments position. The first mining boom from 2003 to 2007 led to a record rise in
resource exports, commodity prices and the terms of trade. This had the effect of
increasing export income because of rising prices and volumes of resource exports.
The first mining boom or mining boom Mark 1 ended with the Global Financial
Crisis in 2008-09 and a period of world recession.
The second mining boom or mining boom Mark II commenced with global
recovery and the resumption of China’s strong economic expansion in 2009-10. It is
still underway although at a slower pace due to the impact of the European
sovereign debt crisis and slow US recovery on the rate of world economic growth.
The Impact of the Mining Boom on the Balance of Payments
There are a number of effects of the current mining boom on Australia’s external
accounts or the balance of payments:
•
A rise in export income associated with a sharp rise in commodity prices and
increased volumes of resource exports. For example, mining exports rose
from $120.1b to $159.4b between 2009-10 and 2010-11 as shown in Table 1.
•
Strong growth in mining investment has led to rising volumes of capital
imports needed to increase productive capacity in the mining and resources
sector.
•
The appreciation of the exchange rate has increased the demand for imports
in the economy as imports have become more competitive relative to
domestically produced goods.
•
The appreciation of the exchange rate has reduced the competitiveness of
manufactured and service exports such as education and tourism and this has
had a negative impact on non resource exports.
•
The rise in profits in the mining industry has increased the income of overseas
residents in the form of profits, dividends and reinvested earnings flowing to
foreign owners of equity in the Australian mining industry. This has led to a
persistently high net primary income deficit in the current account.
•
Inflows of both debt and equity capital into Australia's mining resources
sector remain high and help to keep the financial account in surplus and offset
the deficit in the current account.
Table 1: The Value of Australia’s Exports of Goods - 2008-09 to 2010-11
Rural Exports
Mining Exports
Manufactured Exports
Total Exports of Goods
2008-09
2009-10
2010-11
$29,383m
$140,073m
$62,108m
$231,564m
$25,589m
$120,145m
$56,075m
$201,809m
$30,471m
$159,455m
$56,787m
$246,713m
Source: ABS (2011), Balance of Payments and International Investment Position, Catalogue
5302.0, September.
Trends in Australiaʼs Trade and the Balance of Payments
2
$m
Figure 1: Australia's Exports 2008-11 ($m)
200000
Rural
Mining
Manufactured
100000
0
2008-09
2009-10
2010-11
Exports and the Trade Balance
Australia’s mining export earnings have increased by almost 90% over the past five
years with a 33% rise between 2009-10 and 2010-11 as shown in Figure 1. This has
been largely due to a 60% rise in commodity prices in Australian dollar terms over
this five year period driven largely by rising prices for iron ore and coal.
At the same time Australia’s rural exports have been affected by consecutive
droughts and floods and have not grown substantially although there was some
recovery in rural exports in 2010-11, rising from $25.5b to $30.4b (refer to Table 1).
Manufactured exports have remained relatively stable in value terms and increased
slightly from $56.1b in 2008-09 to $56.7b in 2010-11. The relative shares of goods
exports in 2010-11 were the following:
•
Rural exports were 12.4% of the total.
•
Mining exports were 64.6% of the total.
•
Manufactured exports were 23% of the total.
In terms of service exports the appreciating value of the Australian dollar has
reduced the competitiveness of education and tourism exports. This has led to a
decline in the value of service exports and a rise in the value of service imports such
as outbound tourism.
The goods balance (exports minus imports) and services balance (exports minus
imports) between 2008-09 and 2010-11 for Australia are shown in Table 2. Australia
recorded a surplus in the goods balance in 2008-09 and 2010-11 but deficits in the
services balance over 2008-11.
Trends in Australiaʼs Trade and the Balance of Payments
3
Table 2: Australia’s Goods and Services Balance in the Current Account - 2008-09 to 2010-11
2008-09
2009-10
2010-11
Exports of Goods (credits)
Imports of Goods (debits)
Goods Balance
$231,564m
-$220,649m
$10,915m
$201,809m
-$204,676m
-$2,867m
$246,713m
-$218,968m
$27,745m
Exports of Services (credits)
Imports of Services (debits)
Services Balance
$52,877m
-$56,170m
-$3,293m
$52,323m
-$53,433m
-$1,110m
$51,456m
-$58,360m
-$6,904m
Goods and Services Balance
$7,622m
-$3,977m
$20,841m
Source: ABS (2011), Balance of Payments and International Investment Position, Catalogue
5302.0, September.
If the goods balance is added to the services balance we get the overall balance on
goods and services. In 2010-11 the goods balance showed a surplus of $27.7b largely
due to the huge increase in mining exports. The services balance was in deficit by
-$6.9b largely due to falling service exports and a rise in service imports. Taken
together the balance on goods and services in 2010-11 was a surplus of $20.8b.
Recent trends in the goods balance, services balance and the goods and services
balance are shown in Figure 2. In 2008-09 there was a surplus in the goods balance
of $10.9b which more than offset the services deficit of -$3.2b. This led to an overall
surplus in the goods and services balance of $7.6b.
In 2009-10 the impact of the Global Financial Crisis on the balance of payments
significantly reduced export earnings which led to a small goods deficit of -$2.8b. The
services deficit fell to -$1.1b as spending on imported services (such as outbound
tourism) fell. The combined effect led to a deficit in goods and services of -$3.9b.
Figure 2: Australia's Trade Balance 2008-11
$m
30000
Goods Balance
Services Balance
20000
Goods and Services Balance
10000
0
-10000
2008-09
2009-10
2010-11
Trends in Australiaʼs Trade and the Balance of Payments
4
In 2010-11 impact of the mining boom on resource exports increased the trade
surplus significantly to $27.7b but the impact of the higher exchange rate led to a
larger services deficit of -$6.9b. However overall the surplus in the goods and
services balance was $20.8b, a turnaround of $24,818b from 2009-10.
Trends in Import Spending
Australia imported consumption, capital, and intermediate goods and services
valued at $277,328m in 2010-11 as illustrated in Table 3:
•
Imports of consumption goods (such as food, beverages, electrical items,
transport equipment, textiles, clothing and footwear, toys and leisure goods)
were valued at $63,567m and accounted for 23% of imports in 2010-11.
•
Capital goods (such as a machinery and industrial equipment, aircraft,
computing, telecommunications and industrial transport equipment) were
valued at $51,366m in 2010-11 and accounted for 18.5% of total import
spending.
•
Intermediate goods (such as fuels and lubricants, transport parts, chemicals,
plastics and paper) used as inputs in domestic production were valued at
$104,035m in 2010-11 and accounted for 37.5% of imports.
•
Imported services (such as freight, travel, transportation, insurance,
finance and business) were valued at $58,360m in 2010-11 and accounted for
21% of imports.
The main trends in import spending between 2008-09 and 2010-11 were a general
decline in import spending in 2009-10 as economic growth slowed after the GFC
which reduced the demand for imports. However in 2010-11 there was a recovery in
spending on imported capital and intermediate goods. The surge in mining
investment to date has been accompanied by a sharp increase in the volume of
capital imports (such as bulldozers and excavators) and intermediate goods (such as
fuel and machinery parts) over the last five years.
Table 3: Australia’s Imports of Goods and Services 2008-09 to 2010-11
2008-09
2009-10
2010-11
Consumption Goods
Capital Goods
Intermediate Goods
Services
-$61,419m
-$49,843m
-$109,387m
-$56,170m
-$62,333m
-$47,027m
-$95,316m
-$53,433m
-$63,567m
-$51,366m
-$104,035m
-$58,360m
Total Imports
-$276,819m
-$258,109m
-$277,328m
Source: ABS (2011), Balance of Payments and International Investment Position,
Catalogue 5302.0, September.
Trends in Australiaʼs Trade and the Balance of Payments
5
Table 4: Australia’s Net Income Deficit 2008-09 to 2010-11
2008-09
2009-10
2010-11
Primary Income
- Credits
- Debits
-$45,407m
$42,823m
-$88,230m
-$47,782m
$36,825m
-$84,607m
-$52,397m
$41,927m
-$94,324m
Secondary Income
- Credits
- Debits
-$995m
$6,657m
-$7,652m
-$1,532m
$6,787m
-$8,319m
-$2,011m
$6,372m
-$8,383m
Source: ABS (2011), Balance of Payments and International Investment Position, Catalogue
5302.0, September.
Trends in Net Primary and Secondary Income
Australia’s net primary income balance is the net sum of income flows associated
with the stock of Australia’s debt and equity assets and liabilities. Australia has a
persistent net income deficit due to the large stock of net foreign liabilities and
because foreigners are estimated to consistently earn higher returns on their
investments in Australia than Australian residents receive on their investments
abroad.
The mining sector mainly affects the net primary income deficit through the share of
mining profits that accrue to foreign investors through dividend payments and
reinvested earnings or profits remitted on direct investment. It is estimated that the
mining industry is up to 80% foreign owned. Other income measured in the net
primary income deficit includes interest paid on the stock of foreign debt. The net
primary income deficit was -$52,397m in 2010-11 up from -$47,782m in 2009-10 (see
Table 4).
Secondary income includes current transfers that are consumed within a short
period (i.e. less than twelve months) and include food aid, remittances from
residents temporarily abroad, and remuneration received by international students
undertaking university studies.
Secondary income credits in 2010-11 totalled $6,372m and consisted mainly of
government transfers and personal transfers. Secondary income debits in 2010-11
totalled -$8,383m and consisted of government transfers, personal transfers and
workers’ remittances. This resulted in a small deficit of -$2,011m in net secondary
transfers in 2010-11.
Australia’s Current Account Deficit
With the goods and services surplus of $20.8b in 2010-11 the current account deficit
has slowed in growth and fallen as a percentage of GDP. This is because the increase
in the goods and services surplus far outweighed the increase in the net primary
income deficit. From a saving-investment perspective this reflects a rise in saving
relative to investment in Australia, since the current account deficit is the difference
between national saving and investment.
Trends in Australiaʼs Trade and the Balance of Payments
6
Table 5: Components of Australia’s Current Account 2008-09 to 2010-11
Current Account
Goods and Services
Net Primary Income
Net Secondary Income
2008-09
2009-10
2010-11
-$38,780m
$7,622m
-$45,407m
-$995m
-$53,291m
-$3,977m
-$47,782m
-$1,532m
-$33,567m
$20,841m
-$52,397m
-$2,011m
Source: ABS (2011), Balance of Payments and International Investment Position, Catalogue
5302.0, September.
If the current account is in deficit, this reflects investment being greater than saving.
Table 5 shows the main components of the current account which is equal to the
sum of balances of goods and services, net primary income and net secondary
income.
In 2008-09 the current account deficit was equal to -$38.7b but rose to -$53.2b in
2009-10 because of the fall in export earnings associated with the slump in export
demand caused by the GFC. However the return to a large surplus of $20.8b in
2010-11 in the goods and services balance helped to reduce the current account
deficit to -$33.5b or -2.5% of GDP.
Capital Account
In the balance of payments the capital account comprises both acquisitions and
disposals of non produced, non financial assets such as patents and copyright as well
as capital transfers. Capital transfers include Australian grants or gifts to developing
countries for capital works projects such as the building of schools, roads and
bridges. The balance on capital account is the net sum of credit and debit entries for
the acquisition and disposal of non produced, non financial assets and capital
transfers. In 2010-11 the balance on capital account was a small deficit of -$304m.
Financial Account
The financial account records all transactions between residents and non residents
associated with a change in ownership of foreign financial assets and liabilities such
as equities, bonds and notes.
These transactions are recorded as assets if they are claims by residents on foreign
financial assets, or as liabilities if they are claims by non residents on domestic assets.
Transactions are divided into the following categories:
•
Direct investment is long term investment in an enterprise in another
economy and net direct investment was valued at $23,750m in 2010-11 as
shown in Table 6. The main vehicles for direct investment include shares,
reinvestment of earnings and debt instruments.
•
Portfolio investment tends to be short term in nature and is channelled
through financial markets and includes shares, and debt securities. Portfolio
investment was valued at $32,512m in 2010-11.
Trends in Australiaʼs Trade and the Balance of Payments
7
Table 6: The Capital and Financial Account 2009-10 to 2010-11
Capital and Financial Account
2009-10
2010-11
$53,959m
$33,204m
Capital Account
-$291m
-$304m
Financial Account
$54,250m
$33,508m
Direct Investment
Portfolio Investment
Financial Derivatives
Other Investment
Reserve Assets
$20,810m
$70,100m
-$9,768m
-$32,821m
$5,929m
$23,750m
$32,512m
-$11,697m
-$7,859m
-$3,198m
Source: ABS (2011), Balance of Payments and International Investment Position,
Catalogue 5302.0, June Quarter.
•
Financial derivatives include swaps and options used to manage risk and
mainly involve deposit taking institutions such as banks as well as central
banks. There was a net deficit in derivatives of -$11,697m in 2010-11.
•
Other investment includes currency and deposits, loans, trade credit and
advances for both short and long terms with deposit taking corporations
such as banks and pension funds.
•
Reserve assets refer to the net holdings of the central bank (the Reserve
Bank) of monetary gold, Special Drawing Rights with the IMF and foreign
currencies and deposits.
International Accounts Ratios
Table 7 shows international accounts ratios for the current account and its
components between 2008-09 and 2010-11. The current account deficit has been
sustainable at below -5% of GDP, reaching a low point of -2.5% in 2010-11. The
goods and services balance reached an historic high of 1.5% of GDP in 2010-11 due to
the large surplus in goods. The net primary income to GDP ratio was stable at
around -3.7% of GDP between 2008-09 and 2010-11.
Table 7: International Account Ratios - 2008-09 to 2010-11
Current Account to GDP
Goods and Services to GDP
Goods Credits to GDP
Goods Debits to GDP
Primary Income to GDP
2008-09
2009-10
2010-11
-3.1%
0.6%
22.7%
-22.1%
-3.6%
-4.1%
-0.3%
19.8%
-20.1%
-3.7%
-2.5%
1.5%
21.8%
-20.3%
-3.8%
Source: ABS (2011), Balance of Payments and International Investment Position,
Catalogue 5302.0, September.
Trends in Australiaʼs Trade and the Balance of Payments
8
Table 8: Foreign Assets and Foreign Liabilities by Industry in 2010-11
Total
Mining
Manufacturing
Electricity, gas, water and waste services
Wholesale trade
Retail trade
Transport, postal and warehousing
Financial and insurance services
Rental, hiring and real estate services
Other industries
Unallocated
Foreign Assets
Foreign Liabilities
-$1,253,049m
$2,034,170m
-$163,258m
-$64,652m
-$7,805m
-$5,507m
-$3,248m
-$3,835m
-$862,839m
-$9,309m
-$103,764m
-$28,832m
$241,230m
$132,223m
$18,518m
$47,163m
$12,261m
$23,073m
$1,064,621m
$29,229m
$233,765m
$232,087m
Source: ABS (2011), Balance of Payments and International Investment Position,
Catalogue 5302.0, June Quarter.
Foreign Investment
Foreign investment has two dimensions in the balance of payments:
•
The investment of debt and equity funds in Australia by foreigners in
acquiring Australian assets. The inflows of these funds are recorded as foreign
liabilities by the ABS because they must be serviced and eventually repaid.
•
The investment of debt and equity funds by Australians and Australian
companies overseas in acquiring foreign assets which are recorded as debits
since they represent outflows of funds from Australia to the rest of the world.
Table 8 shows the value of foreign assets and liabilities in 2010-11 by industry. The
total stock of foreign assets owned by Australians and Australian companies was $1,253,049 which represents the claims on foreign assets.
Total foreign liabilities were valued at $2,034,170m in 2010-11. The major industries
involved in international debt and equity lending and borrowing were financial and
insurance services and mining.
Since Australia has a growing economy with large investment opportunities in
mining and other sectors, the inflow of foreign investment exceeds the outflow of
Australian investment abroad. In 2010-11 this led to a financial account surplus of
$33,508m (Table 5).
Trends in Australiaʼs Trade and the Balance of Payments
9
Table 9: Australia’s Net International Investment Position in 2010-11
Foreign Assets
Foreign Liabilities
Total
Equity
Debt
Total
Equity
Debt
-$1,253,049m
-$628,520m
-$624,529m
$2,034,170m
$734,650m
$1,299,520m
Net Foreign Liabilities
Net Foreign Equity
Net Foreign Debt
$781,121m
$106,130m
$674,991m
(57.3% of GDP)
(7.8% of GDP)
(49.5% of GDP)
Source: ABS (2011), Balance of Payments and International Investment Position,
Catalogue 5302.0, June Quarter.
Table 9 shows that over time the stock of foreign liabilities had risen to $2,034,170m
in 2010-11, consisting of $734,650m in equity borrowings and $1,299,520m in debt
borrowings. Total foreign assets were valued at -$1,253,049m in 2010-11, consisting
of -$628,520m in equity lending and -$624,529m in debt lending abroad.
Australia’s stock of net foreign liabilities (i.e. foreign liabilities less foreign assets) was
$781,121m or 57.3% of GDP in 2010-11, the majority of which was represented by
net foreign debt of $674,991m (or 49.5% of GDP), with net foreign equity at
$106,130m (or 7.8% of GDP). The servicing cost of net foreign liabilities in terms of
interest and dividend payments abroad, leads to the net primary income deficit.
The Structural Problem of Low National Saving
The structural or underlying problem in the Australian economy causing the
persistent current account deficit is the shortfall of national savings in relation to
domestic investment. National saving is equivalent to private saving plus public
saving. National saving declined from nearly 30% of GDP in the mid 1960s to
around 20% of GDP by the late 1990s and mid 2000s, whilst national investment
fluctuated between 30% and 25% of GDP in the same period. This led to increasing
reliance on foreign saving to finance that part of national investment not financed by
national saving. Public saving deteriorated in the recession of the early 1990s to less
than 5% of GDP, whilst private saving fell from 20% of GDP in the 1970s to 15% by
the late 1990s.
The Australian government tried to achieve budget surpluses in the late 1980s
because many economists argued that a rise in public sector saving could help to
reduce the current account deficit and foreign debt. This was based on the ‘twin
deficits’ hypothesis as illustrated in equations (1), (2) and (3):
(1)
(2)
Y = C+I+G+X-M
Y = C+S+T
(i.e. the sources of national income or GDP)
(i.e. the uses of national income or GNE)
Subtract equation (2) from equation (1) and rearrange terms, gives us equation (3):
(3)
Y-Y =
0 =
S-I =
C - C + (I - S) + (G - T) + (X - M)
(I - S) + (G - T) + (X - M)
(G - T) + (X - M)
i.e. Saving - Investment = Budget Deficit + Current Account Deficit
Trends in Australiaʼs Trade and the Balance of Payments
10
Equation (3) suggests that the difference between saving and investment is
equivalent to the sum of the difference between government spending and revenue
(i.e. the budget deficit) plus the difference between exports and imports (i.e. the
current account deficit). It was argued that a direct way to reduce the current
account deficit (and the saving-investment or spending-output imbalance/gap) was
to reduce the size of the budget deficit. Although the federal government achieved
budget surpluses between 1987 and 1989, the current account deficit and the foreign
debt continued to represent an ongoing constraint to domestic economic growth.
For example, the asset price boom in 1988-89 led to an ‘import binge’, a further
‘blow out’ in the current account deficit, and a burgeoning net foreign debt, as
overseas borrowings escalated to finance the current account deficit.
In 1989-90 the government used a high interest rate policy to reduce gross national
expenditure or GNE to slow down import spending and the inflationary boom. In
the early 1990s the current account deficit became more sustainable, remaining
below -4% of GDP, whilst the ‘equity for debt swap’ saw the net foreign debt fall to
as low as 37.3% of GDP. However by 1994-95 domestic economic growth had again
risen to an unsustainable level, causing the current account deficit and net foreign
debt to both grow as percentages of GDP. This prompted three tightenings in
monetary policy in late 1994.
The Asian crisis (coupled with high domestic growth) in 1997-98 led to a large fall in
Australia’s export earnings relative to import spending, resulting in a current
account deficit of over -5% of GDP, and the net foreign debt also increased to over
40% of GDP by 1999-2000.
The FitzGerald Report on National Saving (1993) recommended that the government
eliminate its budget deficit, and reform the tax system as a means of boosting
national savings, through greater incentives for private saving. The Hawke
government introduced the Superannuation Guarantee Levy (SGL) in 1991 to
encourage the spread of compulsory superannuation to help raise private saving.
The Howard government, elected in 1996, implemented a number of the FitzGerald
Report’s recommendations, designed to raise national saving:
•
Eliminating the Commonwealth budget deficit and returning the budget to
surplus. Budget surpluses have lifted public savings and reduced the public
sector’s call on private savings.
•
Reducing the Commonwealth’s general government net debt to GDP ratio
from 20% in 1995-96 to 1.3% by 2004-05 through the proceeds from the
privatisation of a number of Public Trading Enterprises (PTEs) and
accumulated budget surpluses.
•
Introducing measures to increase private saving such as tax rebates for
private savings; a retirement incomes policy; taxation reform measures in
budgets between 2000 and 2007, such as introducing the GST and cutting
marginal tax rates (MTRs) to boost private saving; and the elimination of
taxation on superannuation in the 2006 budget for retirees reaching 60.
NB:
The Gillard government is planning to increase the superannuation guarantee
levy (SGL) from 9% to 12% of gross earnings in 2012-13.
Trends in Australiaʼs Trade and the Balance of Payments
11
The Current Account Balance and National Saving and Investment
Between 2005-06 and 2008-09 the current account deficit was affected positively by
Australia’s rising terms of trade. The trade balance improved because of the
increased volume and value of mineral and resource exports, although the net
primary income deficit continued to widen, reflecting robust growth in the
remittance of mining profits and rising net interest payments because of a rising
stock of net foreign debt. Overall the current account deficit was relatively stable at
-5% of GDP, reflecting some improvement in the trade balance but continued
growth in the net primary income deficit.
In terms of Australia’s net lending position (i.e. the difference between national
gross saving and investment), changes have occurred in the net lending position of
various sectors in the economy:
•
Households have historically been net lenders, but between the 1980s and
2000s shifted to a net borrowing position, particularly in 2002-03 to fund
spending on housing. However with higher domestic interest rates,
households reduced their borrowing between 2003 and 2011 and increased
their saving with the household savings rate rising to 11% in 2011. This was
partly a response to the Global Financial Crisis in 2008-09 as households
reduced their levels of debt and increased their precautionary saving as part
of a strategy to repair household balance sheets.
•
The government sector has increasingly become a net lender, with rising
general government saving due to the accumulation of budget surpluses,
more than offsetting government investment. However the return to budget
deficits between 2008-09 and 2010-11 due to the impact of the Global Financial
Crisis on taxation revenue and government expenditure reversed this trend,
and the government sector became a net borrower of funds in financial
markets in 2008.
•
The business sector has remained a net borrower of funds reflecting high
rates of investment, particularly in the mining and energy sectors as well as
investment in ICT goods.
Policies to Reduce the Current Account Deficit
The Australian government has used a combination of macroeconomic (i.e.
monetary and fiscal policies) and microeconomic policies to try to reduce the size of
the current account deficit to under -5% of GDP. This is the condition for achieving
sustainability in the growth of the current account deficit.
Monetary policy is conducted by the Reserve Bank of Australia and is used to
control CPI inflation and to provide an anchor for inflationary expectations. This is
achieved through the use of an inflation target of 2% to 3% CPI inflation over the
economic cycle. Keeping inflation within the target band is important for
maintaining the competitiveness of Australia’s export and import competing
industries, which are vital for reducing the size of the current account deficit.
Contractionary monetary policy can also be used to reduce the growth in import
spending if the current account deficit becomes unsustainable. Higher interest rates
would reduce import spending and stabilise the current account deficit but could be
at the cost of lower economic growth and higher unemployment.
Trends in Australiaʼs Trade and the Balance of Payments
12
The Australian government has tended to mainly use fiscal policy to reduce the size
of the current account deficit. Fiscal policy had a medium term focus of raising
public saving through the accumulation of underlying budget surpluses between
1998 and 2008. Budget surpluses helped to eliminate the public sector’s call on
national saving through the retirement of public debt. This helped to reduce that
part of the net foreign debt owed by the Australian government. The fiscal
consolidation strategy was based on the ‘Twin Deficits Argument’ of a link between
the budget deficit and the current account deficit.
In terms of microeconomic policies the Australian government has used various
microeconomic reforms in the longer term to improve the economy’s level of
allocative efficiency and productivity. For example, industrial relations policy is
important in linking wage movements to improvements in productivity at the
workplace. This helps to contain wage expectations and encourages firms to adopt
competitive labour and management practices which are essential for firms
exporting to the global market. Labour market reforms such as the Workplace
Relations Act 1996, the Workplace Relations Amendment Act 2006 and the Fair Work Act
2009 have all placed an emphasis on productivity based wage bargaining.
Microeconomic reforms in infrastructure industries such as electricity, transport,
water, gas and telecommunications have also been critical in reducing input costs for
Australian industry and assisting the improvement in international competitiveness
and productive capacity over time.
Other important microeconomic reforms include the national competition policy and
the cuts to industry protection, which have increased the level of competition in the
Australian economy. More competitive domestic industries help to boost exports as
a share of GDP, thereby reducing the trade deficit and the size of the current account
deficit. Industry policy also has a role to play in encouraging innovation, risk taking
and investment in research and development, which the Australian government
believes are essential for building world competitive firms.
The Pitchford Thesis: The Financial Account ‘Drives’ the Current Account
In the 1990s an alternative analysis of the current account deficit by Professor John
Pitchford from ANU was that the current account deficit was a result of the capital
and financial account surplus. This surplus sets up a high servicing cost in terms of
interest, profit and dividend payments remitted overseas and increases the size of
the net income deficit and the current account deficit. Rising current account deficits
increase the need for foreign borrowings which increases the size of the net foreign
debt. Pitchford argued that this was not necessarily a problem if the funds
borrowed were invested in export industries, which would increase export income
in the future. The Australian government has largely accepted the ‘Pitchford thesis’
that the current account deficit reflects private saving and investment decisions and
that the current account deficit is sustainable if borrowings are invested in exports.
Forecasts for 2012-14
The current account deficit is expected to widen to 4.75% of GDP in 2012-13 and 6%
of GDP in 2013-14 as the trade balance moves into deficit, driven by declining non
rural commodity prices and surging import volumes associated with the resources
investment boom.
Trends in Australiaʼs Trade and the Balance of Payments
13
2011 HSC Economics Examination
Question 22 (10 Marks)
(a)
The table shows current account data for an economy.
(i)
Component
Year 1
($bn)
Year 2
($bn)
Exports of goods and services
250
300
Imports of goods and services
275
350
Net Income
-50
-60
Current Transfers
-5
-5
Calculate the change in the current account balance from Year 1
to Year 2.
2
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(ii)
Outline ONE factor that may have caused the change in the
Net Income component of the current account.
2
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(iii)
Outline ONE factor that may have caused the change in the
Import component of the current account.
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
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Trends in Australiaʼs Trade and the Balance of Payments
14
2
(b)
Why does Australia have a persistently high current account deficit?
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_______________________________________________________________
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Trends in Australiaʼs Trade and the Balance of Payments
15
4