A current account deficit occurs when
credits on the current account is smaller than the debits on the current account. Australia runs a current account deficit due to our low household savings ratio causing a savings and investment gap. Since under a floating exchange rate the current account + capital and financial account + net errors and emissions must equal zero, Australia's current account deficit is offset by a capital and financial account surplus. A capital and financial account surplus increases foreign liabilities since any financial flow that comes into Australia must earn some kind of return. Increased foreign liabilities as a result of the current account deficit is because the economy may be forced to borrow more money in order to fund its existing debt servicing costs on the current account. This will lead to an increase in deficit on the net primary income. I hope this helped. If you have anymore questions feel free to ask.
