The balance of payments records the flow of money from everything including exports and imports of goods, services and financial assets (such as shares and bonds) – even transfer payments like foreign aid. Basically: payments to foreigners and payments from foreigners.
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Of course, by “Australia’s transactions” we mean those made by Australian residents. Loosely, this means people who live here, businesses operating here, and our governments, which all do deals with the rest of the world.
Now, back to the current account. Why has Australia recorded so many current account deficits?
Historically, we’ve tended to import more than we export, and we’ve paid more in dividends and interest to foreign owners and lenders than they have to us for our foreign shareholdings and loans.
Whenever we import, or pay income (such as dividends) out to people in other countries, it’s recorded as a “debit” in our current account and an equal “credit” in what’s known as the “capital and financial account” – which we’ll come back to. When we export, or receive income from overseas, it’s a “credit” in our current account and an equal “debit” in the other account.
Because of this, the two accounts are, in theory, meant to balance out (because of measurement issues, they usually don’t). When the debits exceed the credits, an account is in deficit. When the credits exceed the debits, it’s in surplus.
The main reason we’ve run so many current account deficits through the years is that we’ve tended to have a heap of investment opportunities (more than we could hope to finance with our own savings).
The inflow of foreign capital meant we were able to grow our economy, paying out dividends and interest to foreign investors for their help. Now, where do we record all this investment?
Enter the capital and financial account. The financial account takes up the lion’s share of the combined bucket. It records any transactions involving assets and liabilities changing hands. This includes things like direct investment (long-term capital investment such as buying machinery or when an investor owns 10 per cent or more of a company through shares), and portfolio investment (smaller purchases of shares in a business, or bonds).
When we sell foreigners shares in an Aussie business, borrow from them or sell them some real estate, that’s a credit in the capital account. When they sell us shares or land or lend us money, that’s recorded as a debit.
Deficits can help us grow and surpluses don’t always leave us better off.Credit: Matt Davidson
The much smaller capital account, meanwhile, captures transactions where nothing tangible is received in return: things such as debt that has been forgiven, foreign aid to build roads, or transactions involving intangible assets (such as trademarks or brand names) or rights to use land.
For some time in the past decade, we briefly went into a current account surplus and a financial and capital account deficit. This was partly thanks to rapid industrialisation in China which turbocharged our exports of minerals, energy, education and tourism (remember: credit in the current account, debit in the financial and capital account), but also our increased tendency to save and cut down our local investment spending on new housing, business equipment and public infrastructure. At the same time, the proportion of our savings going into superannuation, which invests partly into shares of foreign companies, had grown.
Recently, we’ve switched back to running a current account deficit. Is this bad? Not necessarily. It’s partly due to a continued fall in commodity prices such as iron ore and coal, for which demand has weakened, which is bad news for our exporters. But we’re also paying more income to non-residents (remember: this is mostly because they’ve been investing or lending to us, usually to help us grow by helping to finance our investment spending).
But the current account deficit is also thanks to factors such as a rise in service imports. We’ve been travelling more, meaning our spending overseas has increased. A bad sign? Hardly.
So, while we have a current account deficit, that doesn’t automatically mean we’re doing badly. Deficits can help us grow and surpluses don’t always leave us better off. Trump should be careful playing his cards.
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