The "Dirty" Economy Of Australia | Economics Explained

this is australia the land down under and my home australia is one of the most successful economies in the world with a very high standard of living for almost everyone that calls it home its citizens frequently top lists ranking the wealthiest average households in the world going back and forth against switzerland who currently holds the top spot but it has achieved all of this while avoiding any type of serious recession for three decades it's because of this that it has earned the nickname the lucky country which sounds fitting because we are lucky in a lot of ways we are lucky to have a very large and abundant landmass with no bordering neighbours and we share that land amongst a very small population there are even some other intangibles like having adopted a robust democratic framework from the uk back when we were nothing more than a we tribe of convicts but what a lot of people don't realize is that the lucky country nickname is kind of an insult leveled against us by economists australia isn't lucky like you made amazing investments into all of the right industries and now you're set for life you're so lucky it's lucky like oh you decided to wear a suit made of stakes wrestle a croc and you only lost one finger in the process you're so lucky you see a lot of australia's success has been predicated on industries that have been less than totally stable in a lot of other countries around the world what's more is that the country looks to be making the same mistakes as all of these other cautionary tales but for some body reason we keep on getting away with it so what is going on here is there something inherently different about the way australia manages its economy that makes it so resilient what are the problems the country could face if this luck ever does run out and is australia actually an advanced economy as always once we have looked at all of this we can put australia on the economics explained national leader board which by popular demand will now be done back on the main channel this video is brought to you by public.com thanks to public you can invest in stocks without having to pay a penny in trading commissions but wait you say i already have a commission free trading app on my phone what's so special about public unlike other commission free trading apps which for the purposes of this video shall not be named public does not direct your trades to market makers or hedge funds also known as pfof or payment for order flow that's a big deal because believe it or not some commission-free brokerages are actually co-owned by hedge funds who surprise surprise do not have your best interests at heart get the app that doesn't sell your trades to hedge funds by going to public.com ee or by scanning the qr code that you see on screen all you have to do is open your camera app scan the qr code and boom you can sign up in under a minute when you sign up with our link you'll not only be supporting your favorite australian economist but you'll also receive up to 70 dollars in free stock after making your first deposit which you can do with just a dollar again that's public.com ee alright so first things first i gotta say that ragging on your own country and how it's run is as much an australian tradition as backyard cricket and tim tam slams i don't intend to be overly negative here because i mean lucky or not the performance speaks for itself australia is obviously doing most things right but if you love something you want to make sure it doesn't hurt itself so here goes is australia an advanced economy i'm sure almost all of you watching would say yes of course it is but what is an advanced economy i have said it hundreds of times on this channel before and countless times while teaching and studying economics before that and i have to admit that i personally never stopped to think about what this broad classification actually meant beyond just being a rich country well it turns out that almost everyone has done the same thing because there is no established numerical standard that defines something as a developed developing or undeveloped country the term is loosely used by the international monetary fund to describe countries that have all of the following factors a high level of per capita income an extremely high level of industry a varied export base and a financial system that has integrated broadly with the wider global economy now there are a few things here that we can easily tick off for australia a very high level of per capita income yeah for sure it's one of the wealthiest countries in the world a well-integrated financial system yeah again australia's currency and banking system is very widely respected despite being the 13th largest economy in the world it has the seventh most widely held currency its ongoing stability is also well established whether it be down to luck or not looking pretty good so far until we get to exports this is what australia's exports look like almost two-thirds is made up of resources and another 18 is comprised of education and tourism a quick side note here is that if you're not sure how tourism and education count as exports just remember that exports track the direction of money flow not the number of containers being loaded onto ships if tourists or foreign students spend money sightseeing or getting an education they are sending money from their country to australia in exchange for goods and services so it's counted as an export and a really good export at that someone taking a selfie in front of the opera house doesn't use up the opera house likewise australia doesn't have a set amount of university degrees to give out this means that they are endlessly renewable and can continue to contribute to the balance of trade for so long as they are still in demand which they were up until about 18 months ago the fallout of the coronavirus has all but eliminated these two crucial export categories this came on top of existing issues facing education in australia that had become a little bit too accustomed to foreign dollars numerous scathing reports targeted a selection of australian universities for basically giving out degrees to foreign students who may not have even been able to proficiently speak the language the degree was being taught in this greed in attracting exchange student dollars is by no means exclusive to australia but it was very prevalent here and it was starting to genuinely hurt our perception in the global community as a very prestigious place to receive an education so maybe these export categories weren't endlessly renewable after all all of that is pardon the pun academic at this point anyway because no international travel means no tourists and no exchange students which means all that is really left is exporting natural resources and cows now think of it like this imagine a country whose exports are almost entirely made up of raw materials and livestock you're probably imagining a developing country at best but more realistically you're thinking of an undeveloped country a country that lacks the skills and infrastructure to provide anything beyond the rocks that they can dig up out of the ground and the food that they would have grown for thousands of years so when it comes to diversity of exports australia might not necessarily make the cut here at least not until these other export categories become possible again and even then it's certainly not what you'd call a well-diversified export base now this has very important implications beyond just missing out on being in the special club of advanced economies an over-reliance on one export class can make your currency very volatile in international markets this is a chart of global iron ore prices in u.s dollars and this is a chart of australian dollars as compared to those same us dollars notice any similarities this does a few things the first is that it increases foreign exchange risk for australian companies doing business abroad and foreign investors that want to invest into australia if you are an australian company you do business in australian dollars if you set up operations overseas you might invest 10 million australian dollars into establishing a factory or some storefronts or whatever let's say your venture is very successful and eventually ends up being acquired for 15 million american dollars sounds great right ah but unfortunately the price of iron ore and subsequently the australian dollar has doubled in that time meaning that you only get back 7.5 million dollars turning this otherwise fantastic deal into a massive expense the same goes in reverse for foreign investors that want to put money into australia which means it has been difficult to attract the kind of tech investment ecosystem that has served places like silicon valley so well in fact some of our largest and most innovative tech companies end up establishing operations in the us for exactly this reason which is a real shame because australia genuinely does have the potential to be a fantastic center of innovation despite its relatively small population australia has made some huge contributions to technology in the form of everything from hearing implants to world-class battery storage the problem is we have failed to hold on to any of these innovations we have a long and sad history of pumping hundreds of millions of dollars into world-changing innovations only for those developments to be profited on by a company in a country who is easy to get invested in this means that instead of producing goods that have had a significant value added to them through technological know-how and advanced machinery our industrial sector is almost non-existent and is shrinking more every year but something still sounds off with this because australia has one of the highest levels of foreign direct investment in the world especially when compared to the relatively small population the problem is that these overseas investors are not necessarily investing in the right things foreign direct investment is where companies and individuals from foreign countries will invest in a nation directly by buying up businesses real estate pieces of equipment or even intellectual properties that they will directly control if a foreign investor bought a factory and decided that they wanted that factory to do nothing but make rubber ducks they would have the right to do that if a foreign investor bought an apartment in a major city and they decided that they wanted to leave it empty they would also be able to do that this is distinct from just regular foreign investment sometimes called foreign portfolio investment which is where foreign investors will buy up things like a non-majority group of shares in a company in this instance they don't have the same level of control over the underlying asset as they would by owning the majority stake or the entirety of the assets foreign direct investment therefore gives people a bit of an uneasy feeling especially when those investments have been made in a country's most valuable industries there have been some very high profile examples such as the acquisition of a vital trade port in darwin by chinese corporation which have made for countless headlines and yeah this is not great but realistically the bigger problem is actually the overall trend just for the record and despite what most people might think it's worth noting that china is far from the largest investor in australia foreign investment primarily comes from the uk and the us and there is a really good reason for this so remember that for a little bit later but for now it doesn't really matter too much where this money comes from it still causes the same issues a whopping 360 billion dollars or 35 of all foreign investments made in 2020 were made into the mining industry which as we have seen is a crucial part of australia's export economy what's more is that these are ultimately finite resources the more that foreign investors profit off these mines the less that will be available to the benefit of the people of the nation like say what was done in norway with their sovereign wealth fund we actually explore this issue in a video i did on the australian economy way back in 2019 it was actually one of the very first videos on the channel in that we found that while mining made up a very large portion of australia's exports and attracted a healthy share of foreign investment it didn't really contribute too much to the domestic economy to explain why we need to talk about taxes australia has some of the highest taxes in the world while our top marginal tax rate of 45 is not crazy by any means it's applied very early australians start paying the top marginal tax rate on every dollar they earn over a hundred and eighty thousand dollars per year this is obviously still a lot of money but it's only the equivalent of about a hundred and thirty thousand us dollars countries like germany have the same top marginal tax rate but that doesn't apply until someone earns 275 000 euro or the equivalent of 320 000 us dollars a german has to earn two and a half times as much before they start paying that top marginal tax rate now don't feel too bad for us australians just yet because the way we have got around this is one of the biggest reasons we are home to the second wealthiest group of people in the world there is a tax strategy in australia called negative gearing what this means is that if you own a property that earns less money in rent than it costs to maintain in mortgage repayments and upkeep you get to count the loss against your income doesn't sound too amazing on the surface lose money just so you don't need to pay tax surely you'd be 55 percent better off just paying the 45 tax rate right well not necessarily for two major reasons the first is a little accounting trick called non-cash deductions basically expenses that are incurred but not paid for in cash put another way depreciation if you buy a house for two million dollars here in sydney that value might be made up of one million dollars worth of land and one million dollars in the actual structure of the home land doesn't depreciate but the house sitting on top of it does if you pencil in that the house should last 20 years before needing to be rebuilt you can expense 50 000 a year in depreciation so let's have a look at how that might play out let's say a senior professional is making two hundred and fifty thousand dollars per year and has two investment properties like the one we saw earlier they get one hundred thousand dollars a year in rent from these two properties which actually bumps their annual income up to three hundred and fifty thousand dollars per year but then come the deductions these properties cost about twenty thousand dollars per year on general maintenance another twenty thousand in land taxes and let's say the interest on the loans for these properties is sixty thousand dollars per year now our investors income is back down to just the two hundred and fifty thousand dollars per year that they made from their job we can keep on going now we count fifty thousand dollars in depreciation from each property and suddenly our investors taxable income is only a hundred and fifty thousand dollars per year so there are really three different numbers here their taxable income their pocketed income and the annual increase in their net worth their taxable income is 150 000 and their take-home income will be 250 000 remember depreciation is just a bit of a counting trickery it doesn't actually cost them 50 000 per year out of their pocket chances are those houses will probably be around a lot longer than 20 years as well now as for the increase in their net worth well property in sydney and most of australia's capital cities has been on a bit of a winning streak in recent decades averaging around 7 per year in capital growth that would give our investors an extra 280 000 per year in average unrealised capital gains bringing their total increase in net worth up to five hundred and thirty thousand dollars per year while only being taxed on a hundred and fifty thousand put another way if someone wanted to make as much money after tax from just working a regular job in australia they would need to be paid nearly a million dollars a year now those of you thinking oh but they'll have to sell their properties to actually access any of the money that they made from capital gains right well that's not entirely true once our investors wait for their properties to increase in value enough they can just get a cash out mortgage to give them an injection of cash if they need it if they don't need it they can still get a cash out mortgage and just use the extra cash as a deposit on yet another investment property the tax system in australia is set up to favor property investments so heavily that it's basically dumb not to be an investor if you have a high income i myself have spoken openly about not being a huge fan of real estate investing but in the interest of transparency i'll say that i have property investments because it's just so hard not to without making your accountant very angry this unfortunately makes property very unaffordable to regular workers especially young professionals working in major cities on comparatively modest salaries it does however attract a lot of the foreign investors we saw earlier especially chinese buyers who are looking for a safer secure place to park their cash where they can actually own properties indefinitely rather than just leasing them from the government for 70 years now this trend is slowing especially in light of the coronavirus but once a lot of these properties are purchased they will never be sold again at least not for a really really long time further diminishing the supply that regular old australians might have to fight over so there you have it a country that made itself very wealthy by digging up dirt to sell overseas and giving it citizens tax breaks for buying up more patches of dirt here at home so far it looks to have made every mistake in the book every wrong turn from every country that relied too heavily on natural resources or encouraged too much pressure to be put on real estate markets but yep here it is seemingly unaffected by it all the lucky country indeed but for my own sake i really do hope that this luck does not run out alright let's put australia on the economics explained national leader board starting as always with gdp australia is the 13th largest economy in the world with a gdp of 1.3 trillion dollars this is in line with all but the true superpowers of the world and it gets an 8 out of 10. gdp per capita is also very high 62 000 per capita is again in line with places like singapore and sweden it gets an 8 out of 10 which might sound low but remember the us has a gdp per capita of 68 000 and there are some extreme examples like luxembourg with six figure gdps per capita so we've got to leave some room for them next up stability and confidence now i know we've just spent an entire video talking about how we're all doomed but be it through luck or good governance or divine intervention australia has managed to glide through countless global economic meltdowns seemingly unscathed it would be doing history a disservice to give it anything but a 10 out of 10 for now australia's growth has been pretty stagnant over the last decade primarily thanks to a sustained decline in the value of iron ore and subsequently a sustained decline in its domestic currency when measured in australian dollars growth has been all right but for consistency's sake we measure all countries in us dollars so it gets a three out of ten finally industry and i'm sorry but this one is going to hurt the country has lost practically all of its domestic manufacturing and even its home grown companies tend to abandon ship once they reach a certain size one redeeming trait is that it does genuinely drive some incredible advances in mining technology but as we've seen natural resources alone do not make for a great economy or a great industrial sector for that matter australia gets a four out of ten altogether this gives the nation an average score of 6.6 out of 10 putting it here on the leaderboard let me know if you agree with these scores i look forward to hearing your opinions let's let the takeaway be that australia has done a few things well and ridden that success for longer than it probably should have been able to but at least for now i know better than to bet against the lucky country fortunately you can suss out some better investment decisions with public.com the sponsor of today's video as the name implies public is about transparency which is why unlike other commission free investment platforms public does not sell your data to third parties like hedge funds or high 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Channel: Economics Explained

Views: 2,275,395

Keywords: economics australia, australia dirt, australia economy, australia economic system, australia economic growth, australia economy gdp, australia economy facts, australia natural resources, australia mining, australia mining industry, australian economy industries, economy of australia, the economy of australia, australia gdp per capita, australia gdp growth, australia gdp rank, economy of australia explained, australian economy explained, economics explained, australian economy

Id: _ohj_pOjp6U

Length: 20min 22sec (1222 seconds)

Published: Fri Oct 01 2021