Australia is a current-account deficit country again. Thirty years ago that sentence would have led the evening news. Today it barely rates a mention.
The silence has a history. In the 1990s an ANU economist, John Pitchford, won an argument that the current-account deficit was not a policy problem. His view became the official view. This post recaps that argument, and then asks whether it still offers comfort. I think it does not, and on Pitchford’s own terms.
The current-account deficit has returned
For most of the three decades before the mining boom matured, Australia ran persistent current-account deficits. They were often around 4 per cent of GDP and occasionally above 6 per cent. In world terms, Australia was a relatively large and persistent capital importer.
That changed dramatically during the 2010s. The enormous investment phase of the mining boom wound down just as the resulting export capacity came on stream. Australia began generating very large trade surpluses and, in 2019, moved into current-account surplus for the first time since 1975.
The current account is not just the trade balance (exports minus imports or $X - M$). It also includes primary income: the interest, dividends and profits Australians receive on foreign investments, less those paid to foreign owners of Australian assets. Australia typically runs a sizeable primary-income deficit because foreign investors have substantial claims on Australian assets. Secondary income, which covers transfers such as remittances, is much smaller.
$$ CA = (X - M) + net\: primary\: income + net\: secondary\: income $$
The post-2019 current-account surpluses did not occur because the income deficit disappeared. They occurred because the trade surplus became exceptionally large and overwhelmed it. At its peak in 2022 the trade surplus exceeded 5 per cent of GDP over four quarters.
That trade surplus has now gone. The trade balance slipped below zero in the March quarter 2026, for the first time since December 2017. The income deficit, at around 3 per cent of GDP, is dominant again. The current-account deficit was a little over 3 per cent of GDP in the year to June 2026, and around 3½ per cent in the June quarter alone.
Somebody has to borrow
A current-account deficit is not inherently a problem. At the global level, every current-account surplus has a corresponding deficit somewhere else. Surplus countries are, in aggregate, supplying capital to deficit countries.
Global imbalances expanded enormously in the years before the GFC and remain substantial today. Germany, the Netherlands, Switzerland, Japan and, at various times, China and the major oil exporters have generated persistent current-account surpluses. Those savings have to be invested somewhere. Australia has historically been one of the countries willing to absorb them.
On that view, the recent return to current-account deficit looks less like a new vulnerability than a return to Australia’s traditional position in the global capital market. That is the comfortable reading. It rests on an argument settled thirty years ago, so the argument is worth revisiting.
The panic of the 1980s
In the 1980s the current-account deficit was the central problem of Australian economic policy. The current-account deficit widened to around 6 per cent of GDP mid-decade, and foreign debt climbed sharply. In May 1986 Treasurer Paul Keating warned that Australia risked becoming a banana republic. The monthly balance of payments release moved markets and led bulletins.
The first response was fiscal. The twin deficits theory held that the fiscal deficit drove the external deficit, so the Hawke government moved the budget into surplus by the late 1980s. The current-account deficit widened anyway. Private investment had boomed, and private borrowing more than replaced public borrowing.
The second response was monetary. Policy tightened through 1988 and 1989, and the cash rate reached 18 per cent in mid-1989. Slowing demand to rein in imports was one of the stated purposes. The recession of 1990 and 1991 followed.
The debate ran well into the 1990s. As late as 1995 the Opposition drove a debt truck around the country, displaying foreign debt. It made no distinction between what governments owed and what private firms owed.
Pitchford and the consenting adults
John Pitchford, a professor of economics at the ANU, thought the whole exercise was misconceived. He set out the case in a 1989 article, “A Sceptical View of Australia’s Current Account and Debt Problem”, and a 1990 book, Australia’s Foreign Debt: Myths and Realities. Max Corden later called it the new view of the current account. In Britain a similar position became known as the Lawson doctrine.
The argument has four steps.
- The current account is the gap between national saving and national investment. It is the sum of millions of decisions by households and firms about how much to save, invest and borrow.
- When a private firm borrows offshore, the firm and its lender bear the risk. If the project fails, they wear the loss. These are transactions between consenting adults, and the government has no better information than they do.
- If something distorts those private decisions, such as the tax system or tariffs, the remedy is to fix the distortion. A current-account target is the wrong instrument. So is monetary policy, which can lift the exchange rate and make the trade balance worse.
- Public borrowing is a separate matter. Governments should judge their own saving and investment on its merits. That is a question about fiscal policy, and the current account adds nothing to it.
There is an important incentive argument underneath the consenting-adults language. Consenting adults generally have an interest in avoiding self-harm. A private borrower has an incentive not to take on debt it cannot service. A private lender has an incentive not to lend money it will not get back. Both can make mistakes, sometimes spectacular ones, but both have their own money at risk.
Governments face a different discipline. The people deciding to spend do not bear the full cost themselves, the political benefits of spending can arrive well before the bill, and some of that bill can be passed to future taxpayers. Government borrowing can be entirely worthwhile, but the agency problem creates more scope for profligacy than exists in a transaction where borrower and lender directly bear the consequences.
The fourth step therefore matters most for what follows. Pitchford’s argument was not that every external deficit was benign. It was that a current-account deficit generated by private saving and investment decisions was not, by itself, a reason for macroeconomic intervention. Who was doing the borrowing, and why, mattered.
How the thesis won
The recession did much of the persuading. Running the cash rate to 18 per cent in part to fix a current-account deficit that private borrowers had chosen looked, in hindsight, like a costly mistake. Through the 1990s the Reserve Bank and Treasury came around. Monetary policy was pointed at inflation, and the current account dropped out of the policy objectives.
The 2000s then supplied the test case. Current-account deficits of 5 to 7 per cent of GDP largely reflected private investment exceeding private saving, while the Commonwealth was around balance or in surplus. The Commonwealth eliminated its net debt in 2006. Foreign capital was financing an expanding private capital stock, including the beginnings of the mining investment boom.
Nothing went wrong. The current-account deficits were larger than those that had alarmed Keating, and almost nobody was alarmed. The investment built export capacity, and that capacity helped produce the enormous trade surpluses that underpinned the current-account surpluses from 2019. The borrowers borrowed, invested and produced the future income from which the foreign claims could be serviced. It is hard to imagine a cleaner vindication.
There were always caveats. The consenting adults did not fare so well in Mexico in 1994, in Asia in 1997 or in Spain after 2007, where private external deficits ended in public rescues. Australia had its own reminder in 2008, when the government guaranteed the banks’ offshore wholesale funding. Private foreign borrowing turned out to carry a public backstop. That backstop was contingent, and no claim was made on it. But the floating dollar, and liabilities largely denominated or hedged in Australian dollars, did the work Pitchford expected of them.
Why now is different
Australia has returned to current-account deficit, but not in the way it used to. The saving and investment identity shows why.
$$ CA = (S - I) + (T - G) $$
In words: the current account equals net private saving plus the general government fiscal balance, across all levels of government.
In the four quarters to mid-2026, the current-account deficit was around 3¼ per cent of GDP. But the private sector was in financial surplus, with saving exceeding investment by around 1½ per cent of GDP. The general government fiscal deficit was around 4¾ per cent of GDP.
So the entire current-account deficit, and more, is the counterpart of government dissaving. Private net saving is offsetting part of the fiscal deficit; the remainder appears as the current-account deficit.
This is accounting, not causation. The 1980s showed that cutting the fiscal deficit need not close the current-account deficit. The point is who is doing the borrowing.
That is almost the mirror image of the 2000s. Then the private sector was in substantial deficit while the Commonwealth was around balance or surplus and state fiscal deficits were relatively small. Now the private sector is in surplus while both levels of government are in fiscal deficit. The current-account balance looks familiar. Its composition does not.
The chart splits government by level, which the national accounts can only do before capital grants and land purchases. On that basis the fiscal deficit and the private surplus are each about a percentage point smaller than the figures above. The reversal since the 2000s is the same on either measure.
Chart note: The ABS Government Finance Statistics are a separate accounting framework and produce a smaller measure of general government net borrowing. The measures are not directly interchangeable.
This changes what the Pitchford thesis tells us. The current account itself is still not the problem. But the consenting-adults defence of the imbalance no longer applies to its source.
The private borrower and lender who directly bear the risk are no longer the reason Australia is in current-account deficit. Government debt is certainly market-priced, but the underlying spending need not pass the same project-level market test. The liability sits with taxpayers from the outset, rather than appearing only if a private risk ultimately migrates onto the public balance sheet.
Three other things differ from the earlier period.
- The stock of public debt is much larger. The current-account deficits of the 2000s sat beside a Commonwealth with no net debt. Today’s current-account deficits sit alongside the debt accumulated since the GFC and the pandemic.
- The trade cushion has gone. With the trade balance below zero, the income deficit now passes straight through to the current account.
- Money costs more. New foreign borrowing is priced at today’s yields. Over time that feeds back into the primary-income deficit.
One thing has improved. Australians, largely through superannuation funds, now hold more equity abroad than foreigners hold here. The net foreign liability position is healthier than the flow figures suggest.
The question Pitchford would ask
There is an irony here. In the 1980s Australia worried about the current account at a time when the private sector was doing the borrowing. Policy makers pushed the budget to surplus and rates to 18 per cent to fix a problem that was not theirs to fix. Today the public sector is doing the borrowing, yet the current account attracts almost none of the scrutiny it once did. The Pitchford consensus helps explain why.
But applying the old reassurance mechanically would misread him. Pitchford’s point was that the current account is the wrong thing to look at. Look instead at who is borrowing and why. For private borrowers, leave it to them. For governments, the discipline is weaker, so the ordinary fiscal question matters: is the borrowing buying something worth more than the future liability it creates?
An external deficit associated with productive investment can create future income alongside the foreign liability. An external deficit associated with current consumption does not necessarily do so. The distinction is not perfectly captured by the budget labels “capital” and “recurrent”, because some recurrent spending can raise future productive capacity, just as some capital spending can produce poor returns. The relevant question is what the spending produces relative to what it costs.
A general government fiscal deficit of around 4¾ per cent of GDP, outside a recession, deserves that scrutiny whatever the current account is doing. But the headline fiscal deficit is not enough either. The next question is what governments are borrowing for.
The answer is partly investment, but only partly. General government net capital investment is running at just under 2 per cent of GDP, somewhat higher than through much of the previous three decades. At least in accounting terms, this is the kind of borrowing for which government acquires an asset alongside the liability. Whether those assets justify their cost is a separate question.
But governments are also running an operating deficit of around 3 per cent of GDP. Around 1 percentage point of that reflects capital transfers to other sectors rather than expenditure on the government’s own capital stock. Even excluding those transfers, current revenue falls short of current expenditure by around 2 per cent of GDP.
The contrast with the 2000s is again striking. Then governments generally ran operating surpluses while still investing. Today governments are borrowing to acquire assets themselves, make capital transfers to other sectors, and cover a substantial shortfall between current revenue and current expenditure. Even after allowing for net capital investment and capital transfers, that shortfall is around 2 per cent of GDP.
None of that tells us that the spending is wasteful. Current expenditure can produce substantial future benefits, just as capital expenditure can produce poor ones. But the comforting version of the investment story is insufficient. Australia’s current-account deficit is not simply the counterpart of governments building assets for the future. A substantial part of the fiscal borrowing requirement reflects current expenditure exceeding current revenue.
That brings us straight back to the question Pitchford’s framework tells us to ask: is the borrowing buying something worth more than the future liability it creates?
None of this is a crisis. A current-account deficit a little over 3 per cent of GDP is modest against Australia’s own history, the dollar floats, and the world still has surplus savings to place. But the 1990s consensus offers no comfort about the fiscal position underlying this current-account deficit. On Pitchford’s own test, the question has moved from the external accounts to the budget.
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