Australia's savings problem and the current account deficit

Introduction

Take a look at the chart above. At first glance it’s just two wiggly lines. But those two lines tell a story about the Australian economy that stretches back more than half a century – and it’s a story that affects everything from your mortgage rate to your superannuation.

The basic idea: saving vs investing

Every economy has to answer a simple question: where does the money for investment come from?

You can build a factory, a road, or a house using two sources of funds. Either you use money that’s been saved domestically – by households, businesses, or the government – or you borrow it from overseas.

The orange line in the chart shows Australia’s gross saving as a share of GDP. The blue line shows investment. When saving exceeds investment, the country is a net lender to the world. When investment exceeds saving – when the blue line sits above the orange – the country is borrowing from abroad to make up the gap.

Australia has had the blue line above the orange for most of the past 50 years.

Something big changed in the 1970s

Back in the 1960s and early 1970s, the two lines tracked each other closely. Australia was saving around 30–31% of GDP and investing a similar amount. The books were roughly balanced.

Then something shifted. The saving rate started falling – and kept falling. By the 1980s it had dropped to around 22–24% of GDP, where it has stayed ever since. Investment, meanwhile, held relatively steady at 24–27%.

That gap – roughly 3–4% of GDP – shows up in the balance of payments as a current account deficit. And it has to be financed somehow. The answer, for Australia, has consistently been: borrow it from the rest of the world.

Why did Australia’s saving rate fall?

The decline wasn’t caused by one thing. Several forces hit at once:

• Government deficits. Large public sector borrowing in the 1970s and 1980s dragged down national saving.
• Financial deregulation. When credit became easier to access, households borrowed more and saved less. The household saving rate went from around 15–20% in the 1960s to near zero in the 2000s.
• Housing wealth effects. As house prices rose, many Australians felt wealthier and saw less need to put money aside.
• Demographics. Ageing populations tend to save less than younger ones.

These weren’t temporary blips. They represented a permanent structural shift in how Australians handle money.

Investment actually held up pretty well

Here’s something that often gets overlooked: Australia’s investment rate didn’t collapse. It stayed healthy by international standards, sitting in the 24–27% of GDP range for most of the past four decades.

So the story isn’t that Australia stopped investing. The story is that Australia kept investing at a healthy rate while simultaneously saving less and less. The foreign capital filled the gap.

And that foreign capital funded real things – at least initially. In the 1970s and again in the 2000s, it went into mining booms. It financed infrastructure. It backed corporate expansion.

But from the late 1990s onward, banks increasingly raised wholesale funding offshore to lend into the mortgage market. Foreign capital was increasingly flowing into Australian housing rather than into productive investment.

That’s a meaningful change. Borrowing to build a mine generates export income that can repay the debt. Borrowing to bid up house prices doesn’t work the same way.

Did superannuation fix this?

When Paul Keating’s government introduced compulsory superannuation in 1992, one of the stated goals was to lift national saving and reduce Australia’s reliance on foreign capital.

The super system has grown enormously. Australian funds now manage around $3.7 trillion – one of the largest pension pools in the world relative to the size of the economy.

But look at the orange line in the chart. The saving rate never went back up to its pre-1970s level. It stabilised, but it didn’t recover.

Why? Partly because households offset their compulsory super contributions by saving less elsewhere – borrowing more on mortgages, putting less into bank accounts. Economists call this “saving substitution”, and the evidence suggests it absorbed a large portion of the super system’s intended effect.

The result is genuinely paradoxical: Australia has one of the largest pension savings pools in the world, yet continues to run persistent current account deficits financed by foreign borrowing. The two things coexist because the financial system found ways to offset the mandated saving with new forms of debt.

What about COVID?

You can see something unusual in the chart around 2020–2022: the two lines briefly converge, and Australia actually ran a current account surplus for a few years.

This was real but temporary. Three things happened at once: household saving spiked because lockdowns stopped people from spending; commodity prices surged, lifting export incomes; and investment held back due to uncertainty. Together these pushed saving above investment for the first time in decades.

But once those distortions faded, the structural gap re-emerged. The COVID episode is best understood as an exception that proves the rule.

Is this actually a problem?

Economists genuinely disagree here.

The optimistic view: Australia is a resource-rich economy in a capital-scarce part of the world. Foreign investors put money into Australia because returns are attractive. That’s not a bug – it’s the global financial system working as intended. Australia has been able to sustain this pattern because foreign investors have consistently been willing to supply capital – attracted by the country’s stable institutions, resource sector, and historically strong returns.

The more sceptical view: it matters what the borrowed money is used for. When it funded mines and infrastructure, the borrowing was growth-enhancing. When it increasingly funds mortgage lending and house price inflation, the case becomes harder to make. You’re left with rising household debt, elevated house prices, and ongoing dependence on foreign lenders – without the productivity gains that would justify the arrangement.

That more critical perspective has become increasingly mainstream in Australian economic commentary over the past decade.

The bottom line

Since the mid-1970s, Australia has consistently invested more than it saves domestically. The gap – typically around 3–4% of GDP – has been funded by foreign capital. What started as investment in resources gradually shifted toward funding a housing credit boom.

Superannuation was meant to fix this. It hasn’t – at least not on the external balance sheet. The saving shortfall persists.

The two lines in that chart have been telling this story for 50 years. The question of whether Australia can change the dynamic – or whether it even needs to – remains one of the more interesting open questions in Australian macroeconomics.