Thursday, June 18, 2009

Crowding out

Sinclair Davidson at Cattalaxyfiles provides a useful discussion and overview of the debate surrounding the crowding out implications of public debt.

Thinking more broadly, and casting our minds back to national income accounting identities (which are logically independent of whether or not, and to what degree, crowding out exists) a sudden increase in the public borrowing requirement will be funded by either an equal reduction (increase) in private sector borrowing (saving) or an increase in our current account deficit.

For Australia, much of the increase in public borrowing has, thus far, been matched by a softening in corporate and household borrowing growth. The key uncertainty over the year ahead is whether this change in the flow of private sector savings will continue, or whether our reliance on offshore savings will increase, pushing out our current account deficit.

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