Unit 1
Unit 2
Measurement and Performance
Every year, the newspapers will feature articles about Australia’s net foreign debt position. Our net foreign debt is equal to the total amount that we owe to people and institutions in other countries, minus the total amount that is owed to us from other countries. In Australia, this figure has been increasing for a number of years.
You can see that on the graph the debt is expressed in two different ways. First, it is expressed as a total figure. Over time, this figure has increased to the point that it now exceeds $600 billion. It is also expressed as a percentage of GDP.
The question that you might be asking yourself is this: Why does Australia have a foreign debt at all? To answer this, let’s start small.Imagine that you want to buy a house. The average house in Australia today costs in excess of $300,000, but we will say that you are going to spend $250,000 because it is your first home. Where will you get the money from? One option is to save the money. The only problem is that if you do that, it will take you a very long time. The money that you could have spent on a mortgage will be spent on rent, and so it could take you many years to save up $250,000. And when you do have that much money, the odds are that the house you want to buy will be much more expensive!
We can improve our standard of living if we choose to borrow the money and buy the house now. The most important factor to consider is whether or not you will be able to meet the repayments. If you can, then borrowing money makes sense.
Australians have shown that they are very willing to borrow money. We are also very good at spending it! Unfortunately we are not as good at saving it. Money that has been saved goes into the domestic savings pool, and is then made available for borrowing through the banks. If people want to borrow money, and the banks don’t have enough domestic savings, then they will choose to use foreign savings. That is, they will borrow the money from a bank overseas.
Today, the vast majority of our net foreign debt is owed by financial institutions. The only reason they have this debt is because consumers and businesses keep borrowing money from them. Some of the external debt is owed by businesses, but it is a relatively small percentage. The federal government has no net debt to the external sector at this stage.
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