Australias Current Account Defict

Australia’s Current account defict Australias Current Account Deficit and foreign debt problem is a complicated and difficult one to fix. For a long time now Australia has had a Current Account Deficit. The balance of payments must be looked at to show where the Current Account Deficit came from. The Balance of Payments Accounts record the nation’s transactions with the rest of the world. The Balance of Payments is Australias GDP measures the flow of economic activity that occurs within Australia over a given period. To account for the dealings with other countries, we need to track all international transactions.

The Balance of Payments records and links all the separate international transactions. It is a set of accounts recording all the flows of value between a nations residents and the residents of the rest of the world over a period of time. The balance of payments is split into two broad types: Current Account transactions and Capital and Financial Accounts transactions. The Current Account consists of payments and receipts resulting from trade in goods and services in the current period, Income payments and receipts of interest, dividends and rents and transfer Payments. The Capital Account records capital transfers and transfers of ownership of certain non-produced, non-financial assets such as patents.

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The Financial Account records transactions in financial assets. These transactions represent Australian borrowing from overseas. The Balance of Payments must balance like all accounts, so that the sum of the Current Account balance and the Capital and Financial Accounts balance is zero. If Australia’s current income receipts from exports of goods and services and from income on foreign assets exceed payments for imports and income payments on foreign debt, then the nation has a current account surplus. If current payments for imports and debt servicing exceed income from exports and income on foreign assets then the nation has a current account deficit.

Australia has run a current account deficit for most of the post World War II period. As can be seen in figure 1 Australia recorded a deficit every year from 1994-97. At the moment the Current account deficit is about 5% of GDP, this figure of less than 2% before 1980. (fig2) This has put great pressure on the financial and capital accounts. During the 1980’s, a decline in national saving coupled with a strong rise in investment spending resulted in a growing shortfall between domestic investment and domestic saving.

This shortfall was funded via access to foreign savings; that is, by means of increasing Australia’s level of foreign debt. The debt has grown from 5% of GDP in 1976 to 40+%. In June of 1998 net foreign debt was $222billion. (Fig3) The debt-servicing requirement on Australia’s overseas borrowing continues to be a significant factor contributing to Australia’s current account deficit. The 1990-91 recession brought about a marked reduction in the need to use foreign savings. This reduction was due to record low levels of domestic investment rather than to any increase in levels of domestic saving. With Australia returning to higher levels of economic growth and national savings continuing to show a declining trend during the 1990’s, pressure again is being placed on foreign savings to finance increased domestic investment.

This growing level of foreign debt will continue to add to Australia’s CAD Several factors have helped shape Australias Current account deficit. Domestic cost structures such as wage costs, government costs, interest rates, the cost of infrastructure services etc as in the form of inflation. In the past, Australia’s domestic cost structures have been high, relative to its trading partners. This has affected Australia’s ability to compete on world markets and consequently. The rate of inflation, relative to other trading nations, will exert significant influence on the size of the CAD.

As seen in fig 4 Australia had a high inflation rate throughout the 1980s and early 90s. Relatively high rates of inflation can substantially push up export prices and make exports less competitive on world markets. High inflation rates also make it more difficult for local producers to compete with imports. Consequently, relatively high rates of inflation can cause the CAD to deteriorate. The degree of protectionist measures has also affected the CAD, over the years, world markets are being deregulated or freed up and opened up. This is making Australia industry more venerable. The value of the $AUD and level of world demand influences the size of Australia’s CAD is very dependent of commodity prices and if the $AUD falls the CAD is effected.

Since 1980 the Australian dollar has fallen by almost half as seen in fig5.