Lining up to be in Australia's shoes

Many nations would give virtually anything to be in Australia's shoes. In a world awash in doubt and high oil prices, its economy has expanded for 14 straight years, unemployment is the lowest in at least two decades - and it boasts a Budget surplus.

That's a novelty, considering the dismal fiscal conditions plaguing Europe, Japan and the US. Toss in Britain and six Group of Seven nations are, to varying degrees, swimming in IOUs to investors.

And then there's Australia; its Government forecasts a surplus of A$8.9 billion in the fiscal year that started in July. That may not sound like much, yet it's a significant amount for an A$800 billion economy, the Asia-Pacific's fifth-biggest.

Can Australia persist in confounding the pessimists? Has it topped out? Perhaps.

"The economy is plateauing, with heat coming out of the housing market," says Karen Hawkett, a Sydney economist with Stone & McCarthy Research Associates.

"While the employment outlook is firm and personal spending still strong, the strong sentiment which prevailed last year has faded as the reduced wealth factor kicks in."

Hawkett says that's "not such a bad thing as this means interest rates are on hold for now".

Australia grew 1.9 per cent in the first quarter, less than half the pace recorded a year earlier. Slower growth and a less frothy housing market are hardly a crisis for the nation of 20 million, which has seen a rise in living standards that has forced sceptics to eat their words.

In a global economy as inherently unstable as this one, of course, one can never be complacent. What if the economy slumps in China, which buys more and more Australian goods? Or if rising oil prices slam the Asia-Pacific region? And while the central bank is confident it has contained Australia's property bubble, what if policymakers are wrong?

Amid such questions, it's heartening to see that Australia has resisted the urge to scrap its bond market. It's been an issue in recent years as Government officials reasoned that future generations shouldn't pay for debt taken on today if the Government doesn't need it. And with Australia enjoying Budget surpluses, who needs to borrow anyway?

Such thinking makes perfect sense, until you dig deeper. Is it really wise for a developed economy to close its debt market? No, and Australia has made the right decision - especially as the economy may be moving into a less vibrant period. Let's hope future Governments don't reverse course.

Few expect Australia to squander its Budget surplus the way the US did. Just four years ago, the US Treasury was mulling whether to scrap its bond market. Estimates for budget surpluses as far as the eye could see and strong growth had debt managers exploring the pros and cons of a debt-free US economy.

Fast-forward to today: The US is again issuing loads of securities after growth slowed, tax receipts fell and the White House cut taxes. Far from being out of jobs, bond traders and salespeople are gearing up for a sustained issuing binge. The US even plans to reintroduce the 30-year bond in the first quarter of next year, a reminder that the world's biggest economy is very much back in borrowing mode.

The US's experience with surpluses has been a cautionary tale for Australia and other nations thinking they can thrive without a debt market. While paying down debt is good government policy, it's also important to leave some bond issues outstanding. At the core of any government debt market is the network of dealers who bid on bonds and make markets for them later on. They're the market's backbone and boast vast institutional knowledge.

Dismantling such a system is a big gamble in the age of globalisation. An economy needs to offer investors all the reasons it can to stay put. If investors in London or Tokyo see their Australian stock holdings fall, they can always shift into Government bonds and ride out the storm. If there aren't any, they may just leave the economy altogether.

- BLOOMBERG