Measurement and Performance

Our ability to achieve stability in the external sector is partly dependent on our ability to save money. There are a number of reasons for this. Here we will explore some of those reasons, and also the way in which the government has acted to try and increase national savings.

National saving is made up of two parts; public saving and private saving. Any saving by the government is considered public, while saving by individuals and businesses is considered private. When we save money it becomes part of the domestic savings pool. This money is used by banks when someone wants to borrow.

Problems develop when the banks do not have sufficient domestic savings to cover the loans that people would like to take out. When this happens, the banks will need to rely on international savings in order to provide funds to cover the loan. In this way, inadequate national savings will contribute to the increase in our net foreign debt. When this happens we can expect to repay the debt with interest. As there is now more money flowing out of the country than in, it will increase the supply of Australian dollars on the foreign exchange market. Not surprisingly, this could result in a depreciation of the Australian dollar.

It is also true that the interest we end up paying ends up as a debit in the net income account. As a result, you can see that every measure of external stability has been affected because of our inability to save.

A slightly more sophisticated analysis will tell you that the current account deficit is actually equal to the savings investment imbalance. Consider this example; imagine that we wanted to invest $100 billion in the Australian economy. Investment spending is made possible through the level of saving (refer to the five sector diagram). If we don’t have sufficient domestic saving, then we must try to attract investment from overseas.

Foreign investment is recorded in the capital and financial accounts. As we also know that the CAD is “balanced” by the surplus in the capital and financial accounts, any increase in this surplus will be matched by an increase in the size of the CAD.

This is a very sophisticated concept, and you don’t really need to understand the detail of it right now. What you do need to understand is that an improvement in national saving can help to improve our external position. As a result, there are several measures which have been put in place by the federal government to try and encourage saving. These measures include:

Superannuation: Superannuation was introduced by the Keating government in the early 1990s as a form of “forced” saving. Businesses pay an amount into an investment account for each employee. This payment is made in addition to the employee’s normal wage. When it was introduced, employees received an additional 3% in their superannuation account. Today, this figure is 9%.

Changes to Superannuation: It is worth considering the changes which have been made to the superannuation system separately. In 2006, the former Treasurer Mr Peter Costello announced that from July 1st 2007, certain payments into a superannuation account, and withdrawals made by eligible people would be tax free. This has encouraged even more saving in to these accounts. The government has also offered low income earners “matched payments”; if a person on a low income makes a voluntary contribution up to $1,000, the government will put in 150% of whatever contribution they make. (In the 2007/08 budget, it was announced that anyone who contributed in this way in 2005/06 would end up receiving a 300% matched payment!)

Savings Rebate: In the past, people who earned income from their savings were forced to pay tax on this money. This was a major disincentive to save. Today, the first $1,000 earned from savings is tax free.

Fiscal Consolidation: Prior to 1996, the Australian government used fiscal policy (the budget) to try and stimulate aggregate demand. Although they were successful in achieving this goal, there were many side effects. Most notably, to run a large budget deficit, the government had to call on significant saving reserves. And when domestic reserves weren’t available, they borrowed the money from overseas. This added to net foreign debt, forced the depreciation of the currency and resulted in an increase in interest rates. (If you look at the statistics between 1993 and 1996, you will see all of these problems occurring simultaneously.)

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