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Appendix: a snapshot of the Debt, Deficit, Budget Surplus, and the Age of Entitlement debate. The IMF is warning of lower commodity prices, which is a major engine of growth for Australia A 10% fall in commodity prices since the Sept quarter is to result in a fall in Australias terms of trade the ratio of prices for exports such as coal to prices for imports. Economists observe that typically, slumps in commodity prices last 2 to 3 years and cause prices to fall by 40% to 50%. Such a fall in prices cuts 0.5% to 1% of growth from the economies of exporting nations (most of which are developing countries, with the exception of Australia). The other risk is the ''pro-cyclicality" of metals and energy (the raw ingredients of industrialisation) that tend to be closely entwined with the global business cycle Ultimately the future direction for commodity prices will depend on China's soft growth landing in 2012: its growth should be between 8.2% and 8.5% in 2012, which a number of commentators think will sustain. Whilst it bears not comparison to the levels reached in Europe and the US, Australia's Debt has also expanded during the GFC Total commonwealth debt has grown from $117Bn (2009) to $237Bn (2012) The Australian debt owned by Asian investors increased from 5.8% in 2009 to 12.9% in 2012. Overall, overseas ownership of the federal government's debt rose to 75%, from 35% in 2003. Because number of major countries, especially the US and France lost their prized AAA-credit rating, this has benefited Australia still holding a AAAA. Analysts also note that it makes no difference who ultimately held Australia's public debt: the increased participation from central banks and sovereign wealth funds is arguably a good thing because their decisions are less prone to sudden reversal". It is in this context that the Australian federal government is committed to bring its budget into surplus in 2012-13, as an implied prerequisite for good economic health. However history shows that the need for a surplus is more nuanced than what is commonly reported Off the back of the 1990 recession, the Federal budget went into deficit in 1991-92 and stayed so until 1998-99. Counter intuitively, from 1992-93 to 2000-01 Australia's GDP grew annually by around 4% each year. It was the longest run of above trend-growth in the past 40 years. Of course GDP doesn't tell the whole story, and in the 1990s it certainly did not tell the story of lack of employment growth. It does however give an indicator of the broader picture and the GDP growth of the early-mid 1990s did eventually flow through to the employment sector. What the graph also shows is that if this year's GDP growth comes in under 3%, it will be the first time in the past 40 years that there has been 4 consecutive years of below trend growth The Government hopes such a scenario will not continue and in the Mid-Year Financial Outlook last November, they forecast GDP growth in 2012-13 at + 3.25%, thus being "on trend", which is also part of how they justify their decision to put the budget back in to surplus. Source: ABS and Treasury
It is also in this context that Shadow Treasurer Joe Hockey called for social spending cuts, ending the "Age of Entitlement" prevalent across Western democracies (incl. US, Europe, Australia) in a speech given at the London Institute of Economic Affairs Hockey contrasts the culture of universal access to payments and entitlements from the state with the concept of ''filial piety'' thriving across Asia where people get what they work for and families look after their own, "which at times, seem brutal but works and it is financially sustainable." He links it to "the sovereign debt problems we are seeing in Europe and the US today are the outcome of countries wanting a lifestyle they cannot afford but are quite happy to borrow from others to pay for.": a burning topic in the current macroeconomic context. Joe Hockey calls to bring 16% of GDP that Australia currently devotes to social spending in line with Koreas figure of around 10%. However, in Australia counter intuitively most of this budget does not go to "perk for voters" (such as the baby bonus), but 2/3 go to health and old age assistance (which consists mainly of the aged pension). This means that even if Australia eliminates all social spending other than Health and Old Age Assistance, social spending would still be at 10.1% of GDP, well above Korea A second counter intuitive data point reveals that Australia's social spending is actually quite low among OECD countries: lower even than the United States (as a proportion of GDP). Source: OECD Finally, the analysis of the middle- and upper-class welfare for working-age families in Australia since 1982 also reveals that there are not a lot of low hanging fruits left to cut. Australia doe not spend a lot on middle- or upper-class welfare: this is because payments are tightly 'means tested' and therefore reduced at a rapid rate when people start earning an income. This means that achieving such cuts will put more pressure on the middle class and will result in an increased polarisation of the debate on social cost and how to fund it. In a post-GFC environment some such as Joe Hockey warn that "financial markets impose fiscal discipline on countries. Because a country which is viewed as approaching its safe limit for debt will find it increasingly difficult to borrow funds at an affordable rate, and eventually the capital markets will close." They view this "as a healthy development, ensuring that countries do not exceed their capacity to service and repay debt." Others do not agree and advocate interventionist policies to counter this trend, as illustrated by Argentina's nationalisation of YPF, or the defiance expressed against the financial markets during the French presidential campaign. Ultimately this debt issue and the provision of social services has direct consequences on Insurance companies and Banks, which are in a broad sense part of the same 'value chain' to protect and grow the financial wellbeing of their customers. Those companies have to understand the issues at play and to adapt their models to keep delivering their purpose.
Source: OECD