One Aussie viewpoint

Lessons from Italy and Australia

by One Salient Oversight

1. Together, the amount of money the Italian government spends on debt
servicing (interest plus paying back principal) is €263,663 million.

Now let’s put that number in perspective.

€263,663 million represents a whopping 41.2% of the Italian government’s
spending in 2007. According to the same document, Italy’s GDP in 2007
was estimated to be €1.475 trillion, which means that debt servicing
also represents 17.9% GDP.
2. Australia’s fiscal example should stand as an example to other nations.
In 1996 when the conservative Howard government came to power, net
public debt was around 20% of GDP. While this was quite small in
comparison to other nations – both now and at the time – steps were
taken very early to cut spending. So although net debt was comparatively
small, it was never allowed to increase. Importantly, cuts to spending
were made when unemployment was moderately high – at around 8%. This
meant that, when the economy recovered from the effects of the spending
cuts, economic growth in the years that followed produced large and
growing budget surpluses and steady improvements in unemployment.
Moreover, the government could then afford to make incremental tax cuts
on an annual basis – a process that was quite politically rewarding.
Since 2005, unemployment has dropped below 5%, big budget surpluses are
run regularly, income tax rates are lower than ever and net public debt
is now negative.

It is likely that the effects of Peak Oil and the subprime meltdown will
be far reaching. Countries that are fiscally weak like Italy will either
be forced into making painful fiscal readjustments or else run their
nations into bankruptcy-in-all-but-name by increasing their deficits. On
the other hand, countries like Australia will be in a more flexible
position and will have room to cut taxes or increase public spending.

What will become of America, though? While I would like to think that
America could avoid Italy’s fate I am not at all certain that bipartisan
steps can be made to rectify the situation before net public debt hits
record levels – say between 75-85% of GDP.

One thing is certain, however, and that is that America’s fiscal
position will determine its influence in the world over the next 20
years. If America should go down Italy’s route, you can almost guarantee
that America, as a society and as an economy, will be a pathetic
reflection of what it was for most of the 20th century.

In the face of a semi-permanent energy crisis along with the spectre of
global warming, what the world of the 21st century needs is a strong,
free America. Being fiscally responsible is an important step in that