Julie Bishop fails Economics I. Guest blogger Ian McAuley

​In justifying the Coalition’s cuts in foreign aid, Julie Bishop said that borrowing from overseas only to hand it back overseas was unsustainable in light of our mounting debt.

That statement has glib appeal, but it’s a serious misrepresentation.

For a start the Government does not borrow from overseas. Rather, almost all the Commonwealth’s revenue is sourced from taxation and other charges. The balance, used to finance counter-cyclical deficit spending or to make funds available for capital projects, is funded by Commonwealth bonds issued on the domestic market.

Second, much of what Australia spends on foreign aid is spent on domestically-produced goods and services, particularly consultancy services.  That part stays here.

The Coalition may have a point in that while the Budget is in deficit, any cut which reduces the deficit reduces Commonwealth borrowing. It could also validly point out that while that borrowing is on the domestic market, many Government bonds will be taken up by foreigners, in recognition of Australia’s low sovereign risk, and some of those bonds taken up by financial institutions will ultimately be financed by borrowing from overseas. That’s the benefit of having a well-earned AAA credit rating, a point which the Coalition is reluctant to acknowledge because it does not align with their story about the situation they inherited from a fiscally irresponsible Labor Government.

That is really a stretch. It can no more be called “borrowing from overseas” than my use of a credit card to buy a meal or an airline ticket. Let’s concede this to the Coalition, however, so we can take the money trail all the way through.

Australian financial institutions are net borrowers from overseas. That’s been so for a long time, because we almost always run a deficit on our current account. That is the difference between our exports and imports, and as a mathematical reality that deficit has to be financed. (It’s the private deficit we don’t hear much about, but it’s many times bigger than our small government deficit.)

When our financial institutions borrow from overseas they do so at very favourable interest rates – much more favourable than those at which governments and private investors in poor countries can borrow. Most aid-recipient countries are lucky if they get a BB credit rating. Their own borrowing has to be for projects with short-term returns, a constraint which does not hinder some commercial projects and government projects with a strong early revenue streams, but which is highly unfavourable for longer-term investments in areas such as health and education, where the benefits are slow to be realized and are diffused through the economy.

And, of course, there is a financial market at work to ration our borrowing. When we borrow $100 000 to finance foreign aid, ultimately that is $100 000 that isn’t available to finance domestic purchases. It may mean a few Australians decide to downgrade from a BMW to a Volkswagen, or to make their next overseas trip in four star rather than five star accommodation.

 

It all comes down to simple economics.  Whichever way we fund foreign aid, we’re putting aside a little of our consumption in order to finance investment for those who are far less fortunate.  Does Julie Bishop really not understand this?

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