Alternative Measures of Australia’s External Indebtedness

Economics is fundamentally concerned with how people maximise their well being with limited resources. Economists are, therefore, interested in measuring these resource, or wealth, constraints. Some statistics are more useful for this purpose than others. GDP per capita is a commonly used measure of real living standards. With some qualifications, an increase in GDP per capita is generally regarded as a welfare improvement. It is also relatively uncontroversial that a rise in the unemployment rate represents a decline in aggregate welfare. By examining how these statistics impact on people’s wealth constraints we are generally able to infer how welfare is affected. As is well known, the current account deficit, which has featured prominently in Australian economic policymaking, provides no meaningful information about welfare changes. Australia’s current account is a reflection of the underlying savings and investment decisions by individuals, companies and governments. These savings and investment decisions are determined by preferences, technology and wealth constraints. Less well known is that the current account deficit may not be a good measure of changes in Australia’s net external liabilities. In popular opinion, Australia’s current account deficit represents the extent to which we are ‘selling off the farm’ and imposing a burden on future generations. However, the current account deficit represents only part of the change in net external liabilities over a given period. In particular, focussing only on the current account ignores any valuation effects on the existing stock of net external liabilities. This paper considers two interrelated issues. First, it examines the extent to which the conventionally measured, current account, represents changes in net external indebtedness. This is largely a question about how to properly measure changes in net external liabilities. Second, it examines the relationship between a properly constructed measure of changes in net external liabilities and the welfare of the average Australian. This is a question about how data relating to net external liabilities should be interpreted. This paper contributes to informed debate by providing an appropriate measure of changes in net external liabilities for Australia. As will become evident, the calculation underlying our measure involves a number of judgements on which there may be disagreement. One of the objectives of this paper is to expose these judgements for debate. Because it is the perceived link between the