Yesterday’s article Joyce reveals Coalition debt debacle — will heads roll? by Bernard Keane and Glenn Dyer correctly highlights the reason the Coalition’s 1996 Debt Truck was quickly banished in the first few days of the 1996 election campaign. Howard and Costello doubled Australia Inc’s net indebtedness (See ABS Cat 5302.0). They showed no skills as chief financial managers of Australia Inc!

Is the Howard-Costello trend going to continue so our foreign indebtedness doubles every eight or nine years? Can Rudd-Swan get us to $1 trillion IIP by 2015? Highly possible, so anyone who makes this an issue for public discussion shouldard be praised.

I started the AusBuy campaign in 1991 for several reasons, one because as a borrower of foreign currencies I had been on the rollercoaster ride of seeing my company’s indebtedness almost double, in my case due to the Swiss franc exchange rate.

I admit I would never have conceived in 1991 that in the intervening years our national indebtedness would jump to $752 billion at September 30 last year, jumping $37 billion in the previous three months! All for 22 million citizens with a mining boom!

Dyer and Keane are wrong on several issues.

Although the federal Government has little foreign borrowings, local and state governments with many of their enterprises (water, electricity, etc) do have significant foreign borrowings.

More importantly, our major banks are effectively government backed, as the GFC showed. No federal Government would dare let one go bust. Therefore their borrowings are effectively public.

Now to the issue of foreign investment. The Foreign Investment Review Board has been most secretive over the past 20 years but the little information released showed that excluding real estate, only 3% of foreign investment was for green field projects, the type that should always be welcomed. The rest was to acquire existing businesses: Arnotts, Dairy Farmers, SPC, Golden Circle, Berri, Coal & Allied — the list goes on and on.

In many cases our key export companies are now controlled by competitor countries, hardly a smart position to be in. For example, Brazil, a major beef producer, owns our largest meat processor.

There seems to be a belief among some economists and journalists that foreign investors are charities whose only aim is to help Australia. I must admit that my investments overseas are not aimed at being charities but to maximise my return.

In my years as an employee, I accumulated little capital. When I started my own business I was then able to accumulate capital a hundred times faster — ownership is important for individuals and countries. Most new resource projects will have little Australian ownership and be structured so there will be not much profit left in Australia.

Over many years, lazy federal Treasurers have excused Australia’s current account deficits with lame excuses: Qantas buying planes, the housing boom, the resources boom. Yet for 30 years the deficits have continued unabated and so Australia Inc’s indebtedness has exploded and is being left for future generations to pay for.

Before Paul Keating, when I sold technology overseas, that income in Australia was tax exempt — a real incentive to earn foreign income. He changed that and with the franking credits systems, foreign earned dividends are now generally penalised — hardly bright moves for a country spending more than it earns!

It also appears from the ABS figures that Australia Inc’s projected population growth will make the present situation worse. The 1980s proposition that a big population would make our manufacturing industries more efficient was never going to be true. My own manufacturing operations usually achieved 4-5% yearly productivity gains through technology, not market growth. Now, of course, much manufacturing has gone offshore so we are dependent on Asia, and particularly China, for basic products for every day living.

So expect organic increases in indebtedness from our population increasing.

It is unlikely that Australia Inc will default although if Australia was silly enough to side with the US in any major conflict with China —  and China stopped buying from us — then our currency would nose-dive, creating massive problems.

The more likely situation is that due to normal market forces, knowing they are in the box seat, lenders will steadily up their rates and our currency will drift down, possibly lower than the $US0.60 it was comparatively recently and stay there. Result — a lower standard of living and major problems for borrowers. Hedging of big amounts will slow the pain but not cure the problem.

I understand Ross Garnaut has said that Australian banks are technically insolvent on the basis that Australia does not have the savings to provide the funding they need and no one can guarantee funding from overseas at necessary rates will always be available.

Australia has always been badly managed financially by successive governments. We have been like a rich kid who did not have to be smart because there was always another inherited asset to sell to maintain lifestyle. Instead, we should be selectively following the examples of Asian countries. They are the main financiers of our lifestyle. Singapore, Japan and Taiwan, with little natural resources such as Australia, are creditor countries. China will soon be the creditor gorilla in the markets.

There are business people, such as Dick Smith, who are worried about Australia Inc’s indebtedness. Australia Inc must survive in a highly competitive world where the big players often fiddle the rules — as China does with exchange rates. We need to be smart.

A simple question Dick and I ask: is it better to be seriously in debt or in credit? We have each been in both situations and the latter is a thousand times better!

Barnaby Joyce has scrambled numbers and this has been a distraction. He has implicitly criticised the Howard Government for Australia Inc’s rampaging indebtedness and that is good.

It is a pity his foray into this important matter has not produced a rational prognosis of Australia Inc’s financial dilemmas.

Harry Wallace is the  founder of the AusBuy campaign.