Do Migrants Worsen the Current Account?

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 that 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.