Australia's balance of payments
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Australia has had persistently large current account deficits for more than 50 years.[1] One single factor that undermines balance of payments is Australia's narrow export base. Dependent on commodities, the Australian government has endeavored to redevelop the Australian manufacturing sector. This initiative, also known as microeconomic reform, has helped Australian manufacturing to grow from 10.1% in 1983-1984 to 17.8% in 2003-2004.[2] There are other factors that have contributed to extremely high current account deficit that Australia has today. Lack of international competitiveness and heavy reliance on capital goods from overseas might increase Australia's current account deficit in the future.
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[edit] National Savings
Low level of national savings also contributes to high current account. This is because excessive expenditure will force a lot of businesses to seek funds overseas. At the same time, when governments run constant budget deficits, they will meet their monetary requirements by borrowing from domestic sector. Economists refer to ‘crowding out effect’ to explain this economic situation. When governments borrow from domestic sector, they force private sector to ‘crowd out’. Since there isn’t enough funds available within inside domestic economy, private sector is forced to borrow from overseas. Borrowing from overseas causes Australia’s current account deficit to grow. But there is nothing wrong with the debt growing if Gross Domestic Product grows at the same time. That is, current account deficit has to stay within 4-5% range in order to meet regular interest repayments on foreign debt that’s borrowed. However, excessive current account deficit, combined with low investor confidence and possibility of currency crisis, will force central bank to implement contractionary macroeconomic policy to restrict economic growth. When economic growth or activity is being restricted, low investment and low levels of expenditure will generally stop current account from growing. Nevertheless, Australia’s current account deficit needs a long term solution in order to secure Australian economy. Many economists, notably John Pitchford, argued that choices whether to borrow or lend are dealt with between private or ‘consenting adults’ and in consequence no governmental intervention is necessary. There are also other experts who argue that Australia’s high current account deficit will undermine Australian dollar and it might experience similar crisis experienced by Thai currency that foreshadowed major economic crisis.
[edit] Servicing Costs
High current account deficits increase Australia's foreign liabilities and as a result of that there is a higher outflow of funds which is associated with interests payments on foregin loans and regular divident payments that have to be made to overseas investors who invested in Australian companies. The graph indicates the fact that net income component has been growing and this has contributed to Australia's high current account deficit (The graph shows deficit not surplus!).
[edit] Trends and Statistics
Performance of Australia's Current Account
| 1989-1990 | 1995-1996 | 2007-2008 |
|---|---|---|
| - 5.5% | - 4.3% | - 5.7 |
This table demonstrates Australia’s balance of payments performance. In 1989 current account deficit equalled to 5.5% of Gross Domestic Product. In 1995 nevertheless it was only 4.3% indicating that Australia’s export base improved between those years. It is predicted by The Economist, that Australia’s current account deficit will be 5.7% of Gross Domestic Product.
[edit] Effects on wider economy
There are multiple complications that result if countries have high current account deficit and high foreign debt. While sustainable foreign debt is not a major problem, unsustainable current account deficit can have serious repercussions for the Australian economy. In December 2007, Australia's deficit hit $19.3 billin which was 18 per cent worse than three months earlier.[3]
[edit] References
- ^ Downwonder Economist.com, March 29, 2007
- ^ Leading Edge, R: "Australia in the Global Economy", Tim Dixon and John O'mahomy, page 133 .
- ^ Record deficit blow-outMarch 5, 2008
