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.
A disadvantage of this structural factor is that it involves a large amount of capital in order to repay the foreign liabilities, in order to reduce the servicing cost of the foreign debt.
Australia’s Balance of Payments (BOP) consists of both the Current Account and the Capital and Financial Account. The balance in the Current Account directly determines the balance in the Capital and Financial Account. This is because the Capital and Financial Account must fund the Current Account (if in deficit). Since Australia generally has an ongoing Current Account Deficit (CAD), The Capital and Financial account is usually in surplus. When added together both accounts must equal zero, when errors and omissions are also added towards the total. The Balance in the Current Account, is influenced through structural and cyclical factors, which in turn influence the level of foreign debt and liabilities in the Capital and Financial Account. A disadvantage of having cyclical factors effect the CAD, is that it represents Australia’s lack of independence. In the case of global downturns, it can mean decreased sales of exports and income, and if the level of imports demanded stays the same, could result in a CAD.
This could have negative effects to the Australian economy, if trade dependency is too great as it may result in unemployment in Australia’s export industries. However an upside is that it will increase investment within Australia, via the Capital or financial account, in order to fund the deficit, increasing greenfield investment to build new capacity including new factories and infrastructure, thus resulting in increased employment. A disadvantage of Australia’s structural factors influencing the CAD, is that it involves a large amount of capital in order to repay the foreign liabilities, which can be a disadvantage if considered unsustainable. Thus the reasons, cyclical and structural, have their disadvantages and advantages, leading to trends that often hold many implications for the domestic economy.
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