The Current Account Deficit in Australia
The reasons for the current account deficit in the balance of payment in Australia, as well as the structure of trade in the Australian economy and the change in its structure in general.
Australia’s Balance of Payments (BOP) consists of both the Current Account and the Capital and Financial Account. The Current Account consists of all exports and imports of goods and services, net income and current transfers. Australia generally has an ongoing Current Account Deficit (CAD) meaning there is more money flowing out of the country in the form of exports, income and current transfers, than there is coming into the country.The Capital and Financial account records all financial assets and liabilities, including foreign investment, whose purpose is to borrow money in the form of investments, in order to fund the Current Account Deficit.
The measurement of the CAD as a % of GDP gives an accurate indication of its relative size to national output over time. If the CAD reaches over -5% of GDP it is considered to be unsustainable since it represents a constraint to domestic economic growth. If the economy is growing at say 4% and the CAD reaches -5%, then the economy cannot grow faster without spending more on imports which in turn will increase the goods deficit and the CAD. Here the RBA will increase interest rates in order to slow economic growth and decrease the size of the CAD as a percentage of GDP.
One reason of Australia’s ongoing CAD and trends are both cyclical and structural. In cyclical terms when domestic growth is faster than world growth, this means that the domestic economy is undergoing increased levels of economic activity, and thus demanding more imports. However because world growth is below the level of domestic economic activity, the level of imports will exceed the level of exports.
A disadvantage of this situation and this cyclical component of the CAD, is that imports represent a leakage in the circular flow and is controlled through market forces of supply and demand. Similarly since the CAD must then be funded through the Capital and Financial Account, the CAD in turn increases Australia’s foreign debt and liabilities.This then will increase the servicing cost of Australia’s debt, which then increases the net income debits in the Current Account in the future, increasing the deficit further. The disadvantage is that if this debt is seen as unsustainable by other countries, it can lead to a large withdrawal of capital, and a shortage of savings within Australia. This is because if speculators fear Australia’s inability to pay back its debt, they will lose confidence in Australia’s investment and financial markets.
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