Econintersect: Simply, external deficit is money owed to non-residents. The USA’s external deficit is approximately $14 trillion and growing. Most economists generally agree that external debt growth faster than GDP cannot continue indefinitely – the arguments arise debating if the current levels are in a danger zone.
The International Monetary Fund (IMF) has postulated that government fiscal austerity of one percent can reduce external deficit up to 1% – but any reduction will be diminished if:
- nominal exchange rate is fixed;
- the scope for monetary stimulus is limited; or
- economies tighten fiscal policies simultaneously.
The study concludes that “the relatively small size of permanent fiscal measures currently envisioned for the United States suggests that fiscal consolidation there will do little to reduce the US external deficit.”
One factor that diminishes the impact of fiscal austerity is the substantial private component of the Gross External Debt Position. According to the latest reports from the U.S. Treasury, only 30% of external debt is “General Government” obligations. Private capital and debt is less directly affected by fiscal austerity that government debt.
The IMF study showed that the highest reduction of external deficit occurred with austerity in the government sectors. Quoting the IMF – “the response of private savings and investment to fiscal policy changes is relatively muted.”