Analyse the Causes and Effects of Australia’s on-Going Current Account Deficit.

1054 Words Apr 7th, 2015 5 Pages

Analyse the causes and effects of Australia’s on-going current account deficit.

The balance of payments is the record of all of a country’s international financial transactions in a given year and consists of the current account and the capital and financial account. The current account consists of non-reversible, external transactions and includes Balance on Goods on Services as well as Primary and Secondary Income components. Australia’s persistently high current account deficit (CAD) is contributed to by structural and cyclical factors and a sustained CAD may have both positive and negative impacts on an the Australian economy

Australia’s current account has persistently been in large deficits since the mid-1980s and
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In recent years Australia’s debt servicing ratio (proportion of export revenue that must be spent on foreign debt) has risen to a high of 11.5%. This high CAD could create a vicious cycle known as the debt trap scenario in which Australia’s interest payments will keep increasing as the foreign debt becomes greater. Today’s foreign debt will then add to a future deficit because the high CAD needs to be financed by borrowing from overseas, which in turn increases the CAD. The effect of debt servicing is the main contributor of the sustained high CAD.

The high CAD is also caused by the low households’ savings ratio of 12%. Australia has one of the lowest levels of household savings in the developed world, and also one of the highest levels of household debt in the industrialised world. This combination contributes to a high level of foreign liabilities, because Australia has to rely on the savings of foreigners to fund local investment. As Australia relies more on foreign savings, it is attracting large financial inflows on the capital and financial account, contributing to the size of its foreign debt and CAD.

A persistently high CAD may impact the Australian economy in both the short and long term, and its consequences can be either positive or negative.

A high CAD will eventually lead to the growth of foreign liabilities. Australia’s net foreign debt has grown dramatically to reach as level of 51% of GDP as of 2014. This growth of foreign

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