- Expenditure-switching policy
- An expenditure-switching policy tries to move spending by residents and foreigners away from foreign goods and towards domestic ones.
- Expenditure-reducing policy
- An expenditure-reducing policy tries to lower total spending in the economy, so that less is spent on imports along with everything else.
Policies to reduce a current account deficit
Can you name the five policies a government can use against a current account deficit?
The first two switch spending, the next two reduce it, and the last works slowly on what the country can sell.
A weaker currency makes exports cheaper for foreign buyers and imports dearer at home, so spending switches towards domestic goods.
Can you think of an example?
The pound falls on currency markets, so French shoppers find Scottish salmon cheaper and UK buyers find French cheese dearer.
Tariffs, quotas and other barriers make imports dearer or scarcer, so buyers switch to goods made at home.
Can you think of an example?
A tariff on imported cars makes British-built cars relatively cheaper, so fewer foreign cars are bought, at least until other countries retaliate.
Higher taxes or lower government spending cut the income households spend, and the government borrows less, so fewer imports are bought.
Can you think of an example?
The Chancellor raises income tax and cuts spending. Households spend less on everything, including foreign holidays and imported electronics.
Higher interest rates cut borrowing to spend and so imports, though they also tend to raise the currency, which works against the deficit.
Can you think of an example?
Bank Rate rises, loan and mortgage repayments go up, and households cut back on new cars, many of them imported.
Policies that raise productivity and quality make a country's goods more competitive abroad over time, without cutting spending.
Can you think of an example?
Money spent on apprenticeships and research helps UK firms make better goods at lower cost, so they win export orders over the following decade.