Alan Wood of the Oz, an occasional reader of this blog, has a piece in today’s Oz which links neatly to this post which in turn links back to Ross Garnaut in the Oz (thanks to Jack Strocchi for the link).
One striking feature is the statement that ”
total national savings – household, government and corporate – have plugged on at about 19 per cent of GDP
. This is superficially inconsistent with my observation, a while ago that net national savings are close to zero (I guessed 3 or 4 per cent of GDP). As this piece from the ABS shows, the actual rate is about 3 per cent. Wood’s observation presumably refers to gross national saving, which includes depreciation. I haven’t checked it carefully, but the number seems plausible.
It’s true that both gross and net national saving have been stable for the last decade or so, but I can’t say that’s comforting. A long expansion ought, I think, to have produced a recovery in national saving, rather than chronic reliance on overseas borrowing.
While I’m less sanguine than Wood, I agree entirely that
Slamming on the brakes now because of fears about our external debt and deficit would be a silly response, particularly as recent history has shown monetary policy cannot fix a current account deficit problem.
The correct lesson of the debate about the CAD launched by John Pitchford in 1990 was not that “deficits don’t matter”, but that contractionary macro policies are rarely a sensible response.
John Quiggin 
I thought the problem of the ‘twin’ deficits theory was that as much as the government tried to pile up supluses to boost savings the private sector becoming so much more confident because of these surpluse borrowed more to invest thus in net terms the deficit became larger.
Or was it another Treasury excuse to get the government of the day to become more resposible?
Below an extract from ABS Measuring Australia’s Progress which show net saving is indeed around 3 % of GDP. (but note the contribution of different sectors – household, govt and private – has varied)
And our new investment is greater than this, so we have to import capital to fund that ie our liabilities to the rest of the world go up. But as I said in a previous post, no-one has yet demonstrated this is a bad thing, because although our liabilities are increasing our real net worth per capita is increasing. Again to quote the ABS.
‘Australia’s real net worth increased by 1.2% over the year ended 30 June 2003 compared with the average annual growth over the period 30 June 1992 to 30 June 2003 of 1.7%. In the latest year the real value of non-financial assets grew by 2.1%, offset by a fall in the real value of financial assets (down by 0.7%) and an increase of 3.7% in the real value of liabilities’.
If our real wealth per person is increasing (and by the way this number adusts for the real value of land), I see no reason to scrimp and save so that our wealth can increase faster. Why should we save more?
John G
ABS Measuring Australia’s Progress
Saving
During the past decade, there was a 2.2 percentage point rise in the ratio of net national saving to GDP (from 0.9% to 3.1%). But the longer term trend has been downward; between 1962-63 and 2002-03 the ratio fell overall from around 9% to about 3%. Similar downward trends in national saving have been observed in some other developed countries, such as the United States of America and the United Kingdom.
There is an important distinction between gross and net national saving (see box). The ratio of depreciation to gross saving has risen during the past forty years – from an average of around 64% in the 1960s to around 83% in 2003. This means that proportionately less of Australia’s gross saving has been devoted to increasing the national stock of fixed capital and more to replacing the existing stock.
Over the longer term (from the 1960s onward), the household sector has been the main contributor to national saving. However, since the early 1970s, the net saving of the household sector relative to GDP has fallen.
The general government sector went from being a net saver during the 1960s to a net dissaver between the 1970s and early 1990s. But during the 1990s, government dissaving was progressively reduced and between 1997-98 and 2002-03 the government sector was again a net saver.
The corporate sector (financial and non-financial corporations) has seen considerable fluctuations in saving since the 1960s. For much of the 1990s, however, the corporate sector has been a net saver.
JohnG
If our real wealth per person is increasing (and by the way this number adusts for the real value of land), I see no reason to scrimp and save so that our wealth can increase faster. Why should we save more?
Interest rate risk.
The correct lesson of the debate about the CAD launched by John Pitchford in 1990 was not that “deficits don’t matter”, but that contractionary macro policies are rarely a sensible response.
The correct lesson of the CAD experience was that conctractionary monetary policy would be a self-defeating response. Fiscal policy is another matter entirely. [Though the Reserve Bank’s target for the tight monetary policy wasn’t really the CAD but the inflation rate.]