Li'l Kev must be beginning to wonder

LAST week The Australian Financial Review reported on a submission made by the Australian Business Council to the Henry tax review. The council recognised that we had a current account deficit that had persisted for 20 years and that was not in the national interest.

The AFR quoted Ashok Jacob, chief executive of Consolidated Press Holdings, who said Australia had the most leveraged banking system in the world and banks had "$900 billion in deposits and $1.5 trillion in loans". "In the next 12 months the banks have to roll over $200 billion of loans," he said.

The deposits aggregate would, of course, include the $34 billion in cash lodged by the Future Fund and any amount lodged by the Reserve Bank during the global financial crisis.

The current account deficit has obvious consequences during the financial crisis but we mustn't neglect the long-term issue: we have been manufacturing less and importing more. We need a long-term policy to revive manufacturing. They don't have to be the same as the industries of the 1950s, '60s and '70s. World manufacturing has moved on since then.

We have been unable to finance our standard of living through agriculture, mining and services. At the height of their contributions we were still running a current account deficit and increasing our foreign debt. In the long term we must manufacture and export value-added goods and services.

Previously, deficit apologists had explained that the current account deficit was either a consequence of us importing materials and capital equipment to make elaborately transformed manufactures for exports or that an exchange rate adjustment would fix the problem. Another explanation was that the minerals boom would clean up the debt and eventually create a surplus.

The Reserve Bank put the free market view on our foreign debt in the 1990s. It was private debt incurred by rational individuals acting in their self-interest. Therefore, it had to be the most efficient market outcome and was not a policy issue for the RBA.

Over time the current account numbers have often been improved by simply ignoring the trade in services, intellectual property, fees and income and the ever-expanding interest payments on the debt. The only numbers considered were our imports and exports of goods - so-called merchandise trade.

Last week's submissions to the Henry review suggested that "Australians aren't great savers".

The Australian banks and the governments of the past 30 years must share the blame for our lack of interest in saving. The banks have borrowed cheaply from overseas and lent expensively at home. This created wonderful profit margins and share prices for our banks but also created the exposure our banks now have to their foreign lenders. This is one way the toxic loan virus has come to Australia.

In the 1980s, when the Swiss franc interest rate was 3 per cent or lower, the commercial lending rate in Australia was above 9 per cent. Borrowings by the low-doc mortgage creators were at 1 per cent or even lower if the funds were borrowed in Japanese yen. Some of the low-doc loans to the hapless mortgagees in the US were at 9 per cent or above.

While we certainly haven't had the opportunity to borrow at those rates, our banks have. Their commercial and personal lending rates have delivered very large margins.

I would like to know the total amount of deposits in accounts owned by older Australians in care or unaware of the investment alternatives and the amount they receive in interest.

This is not an insignificant issue. Nearly 1.2 million people are employed in the aged and health-care segment of the Australian economy. They are looking after a lot of people.

Also I would like to know how much money is in accounts for children or in come-and-go business trading accounts at any point of time.

Some ill and older people receive no interest on their accounts even if they have substantial long-term deposit balances that are not term deposits. They might as well have put the cash under their beds.

While it is theoretically rational to expect people to handle their finances efficiently, how do they do that if they have dementia or are ignorant of the alternatives?

Those people who have created our $60 billion credit card deficit are captives of the banks. How can the banks charge interest rates of more than 20 per cent on those debts? Those rates haven't gone down as the RBA has reduced interest rates.

Don Argus, former chief executive of National Australia Bank and chairman of BHP Billiton, said we had to enliven the corporate bond markets, which had been largely dormant for 20 years as investors preferred equity investments to debt. The reason corporate bond issues are now being subscribed fully is that investors with money are picking through the carcasses of companies with great assets and debts they can't repay when due without raising capital.

The banks have been happy to arbitrage the overseas rates they received when they borrowed money against the rates they charged in Australia. A lot of foreign capital has come to Australia in past years because of that arbitrage rate.

Ultimately the re-leveraging of the Australian banks is not a long-term solution even if it helps us in the short-term mess we, and the rest of the world, are in. We destroyed a lot of our ability to leverage the Australian economy when we destroyed so much of our manufacturing base. We have imported more and made less for the past 30 years. Manufacturing almost became a dirty word.

Manufacturing is the sector we must build up in the long term. It has the authentic ability to be innovative. The new sector will be very different from Paul Keating's rusty sheds of the 1950s. The present manufacturing survivors are already light years away from that destructive anachronism of the industry.

Many people are gravely affected by the global financial crisis. The present spin from many sources is like the propaganda of the world wars. The boys won't be home and the crisis won't be over by Christmas. Anyone who tells you that they can model our future in the next five years is either deluded or a charlatan.

We need to export more value-added goods and import less. It is not good enough to simply work out how Australia can borrow more. -- Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.