Macroeconomics Case Study

Australia: Managing the Current Account Deficit

OR

Abstract: The Australian economy had a consistent growth, which was supported by an increase in domestic demand. For many years, the GDP (gross domestic product) growth rate was high, but the country had current account deficit. The Australian government took measures such as floating the Australian dollar, tightening its monetary policy and cutting the tariffs to encourage trade and reduce the gap in the trade balance. The government also implemented structural reforms like introducing a new tax system and the superannuation guarantee scheme. Although these reforms helped to increase the public revenue and encourage savings among the people, the Australian government was unable to manage the current account deficit. The current account deficit followed a cyclical trend, as it reduced in 2001 and widened again in 2003.

Pedagogical Objective:

• To discuss the reasons that led to the growing deficits in the current account of Australia and how the Australian government tried to manage it.

Keywords : Australia's current account deficit; Domestic demand; Superannuation guarantee scheme; Australian dollar; Reserve Bank of Australia; Inflation targeting and monetary policy; Net foreign liabilities; Goods and services tax; Australian accounting standards