There is some concern in Australia that immigration contributes to a widening of its current account deficit. Several cross-section studies have found that migrant households have a lower saving rate than the local born households. In conjunction with a well-known national income identity that the current account deficit is equal to the excess of investment over saving, such findings have been interpreted by many to mean tha the migrants contribute to increasing the level of foreign liabilities at a rate greater than that by the local-born. However, it should be realized that immigration impacts on the economy in a complex way through various demand and supply side channels. Its direct and chain effects on such variables as the current account are spread over both the short and the long term. These effects are neither unidirectional nor always easy to isolate. The final outcome, which is the sum total of all the effects, is uncertain, and cannot be fully understood from a knowledge of cross-sectional saving performance alone. This article utilizes aggregate time series data to investigate the relationship between the current account and immigration. It finds that although an increase in net migration tends to raise the current account deficit, the longer term effect of immigration on the current account is negligible.Australia's foreign liabilities have increased rapidly since the 1980s. While total net foreign liabilities were only 13.5% of GDP in 1979, they reached 58.4% in 1995-96. Together with these liabilities, service payments also rose and now consume about 20% of export earnings. Fear exists among Australia's general public and policymakers that high indebtedness may put the national economy at risk to international capital markets, impose a heavy repayment burden upon future generations, and reduce future growth potential. Considerable attention is therefore given in public debate to reducing the level of foreign liabilities. There is some concern in Australia that immigration contributes to a widening of its current account deficit, and several cross-sectional studies have found that migrant households have a lower savings rate than do local born households. Aggregate time series data are used to investigate the relationship between the current account and immigration. Analysis of the data indicates that although an increase in net migration tends to raise the current account deficit, the longer term effect of immigration upon the current account is negligible. One should, however, understand that immigration impacts upon the economy in a complex way through various supply and demand side channels, with direct and chain effects upon variables such as the current account spread over the short and long terms. The effects are neither unidirectional nor always easy to isolate. The final outcome, which is the sum of all the effects, is uncertain.

[No Keywords available]

current account Australia economic impact national economy immigrant population