Analyse the effects of Australia’s ongoing high current account deficit (CAD) on the Australian economy
The current account deficit (CAD) is recorded when the debits in the current account (imports and income payments to overseas) are greater than the credits (exports and income payments from overseas) Australia has a particularly high CAD, Australia’s current account has been in deficit for most of its history, and consistently over the past three decades The deficit widened from the early 1980s, averaging around 4 per cent of GDP over this period, compared to an average of 1½ per cent of GDP over the preceding two decades. The CAD has widened further since the start of the resources boom, averaging 5¼ per cent of GDP over the past five years, and this has divided many economists. There are clear risks associated with a sustained high CAD, and these include foreign liabilities, servicing costs, exchange rates, economic growth, contractionary economic policy and a sudden loss of international investor confidence.
Over a period of time a high CAD will contribute to an increased level of foreign liabilities. A deficit on the CA presupposes financial flows inflow on the capital and financial account in the form of foreign debt (borrowings from overseas) and foreign equity (selling equity in the form of property and companies). This means lenders will be reluctant to lend or invest in AUS. Also, because Australia finances a large proportion of its CAD by borrowing from overseas, this ensures that Australia’s foreign debt will continue to grow.
Foreign debt grew steadily in the 2000’s, with rising CADs reflecting increased levels of foreign borrowing. The slower growth in debt and overall liabilities in the past few years reflect the lower CADs of recent years.
Increased servicing costs associated with high levels of foreign liabilities lead to larger outflows on