One of the most remarkable developments in our economy in recent times is also the most unremarked: after endless decades of running a deficit on the current account of our balance of payments, for the past two years we’ve been running a surplus. Which looks likely to continue.
Because a “deficit” sounds like it’s a bad thing, and the media know their audience finds bad news much more interesting than good news, I guess it’s not so surprising this seemingly good news hasn’t attracted much attention.
But one thing economics teaches is that, contrary to popular impression, not all deficits are bad and not all surpluses are good. It depends on the circumstances. But regardless of whether they regard a current account surplus as a good sign or a bad one, I suspect most economists think there are more important issues to worry about.
This week the Australian Bureau of Statistics revealed a record trade surplus of $10.5 billion in just the month of June.
We recorded a current account surplus of $17.6 billion during the March quarter this year. That compares with a peak deficit of $23.5 billion in September quarter, 2015.
Since the bureau started publishing the figures in 1959, we’ve run 221 quarterly deficits, but just 26 surpluses. Eight of those have come over the past two years.
But let’s start at the beginning. A country’s “balance of payments” is a summary record of all the transactions during a period of time between, in our case, an Australian on one side and a foreigner on the other. Those on either side could be businesses, governments or individuals. Mainly they’re businesses.
Conceptually, the balance of payments is recorded using double-entry bookkeeping, where one side of the transaction is recorded as a debit and the other as a credit. So, when you add up all the debits and add up all the credits, the two amounts should be equal. Thus the balance of payments is in balance at all times.
This matters because the balance of payments is divided into two main accounts, the “current account” and the “capital and financial account”. The value of transactions involving exports or imports of goods and services goes in the current account, as do payments – in or out - of income such as interest and dividends.
But the other side of each of those transactions involving exports, imports or income payments, the amount someone has to pay – the financial side of the transaction – goes in the capital account, as do purely financial transactions, such as when one of our banks borrows from or lends to some overseas bank, or when one of our superannuation funds buys or sells shares in a foreign company.
Bear with me. The income we earn from foreigners who buy our exports or pay us dividends or interest is recorded as a credit, whereas the money we pay to foreigners for our imports or as dividends on the Australian shares they own or interest on the money they’ve lent us is recorded as a debit.
When we sell them 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.
An account where the debits exceed the credits is in deficit. When the credits exceed the debits it’s in surplus.
There had to be a reason for explaining all this, and we’ve reached it. Historically, we almost always imported more than we exported, running a deficit on trade in goods and services. Likewise, we always had to pay more in dividends and interest to foreign owners and lenders than they had to pay us on our foreign shareholdings and loans to them, thus causing us to run a “net income deficit”.
Put the trade deficit and the net income deficit together and you get the balance on the current account, which was always in deficit. Oh no!
But here’s the trick. Since the double-entry system means the debits always equal the credits, if we always ran a deficit on the current account of the balance of payments, that means we always ran an equal and opposite surplus on the capital account. Yippee!
So if you think it’s good news that our current account is now in surplus, what do you think of the news that our capital account is now in deficit? Time to stop assuming all deficits are bad and all surpluses good.
In all the decades that our current account was in deficit, economists never thought that a bad thing. They knew Australia was – and should be – a “capital-importing country”. We always had a lot more investment opportunities than we could finance with our own saving, so we invited foreigners to bring their savings to Oz to participate in our economic development.
This continuous inflow of foreign capital gave us a continuous surplus on the capital account and thus allowed us to import more than we exported. Naturally, we had to pay big dividends and interest to those foreign investors.
So, why has all that reversed? Well, the reversal began in about 2015, long before the pandemic. Its first main cause is the rapid industrialisation of China, which has greatly increased our exports of minerals and energy and, until the pandemic, education and tourism.
But a second, less-favourable development has been our part in the rich economies’ slowdown in economic growth since the global financial crisis in 2008. This has involved increased saving and reduced investment spending – both of which have helped move our current account towards surplus and our capital account towards deficit.
Economists at the ANZ Bank predict the current account will fall back towards balance over the next few years. But we won’t return to our accustomed capital-importing status until we and the rest of the rich world escape the present low-growth trap.
