Bulletin – June Quarter 2014 Why Has the Net Income Deficit Narrowed? Abstract

Between late 2010 and early 2013, Australia's net income deficit narrowed to its lowest point since the early 1990s. This article examines the reasons for this narrowing and finds that it was mainly due to declines in the average yields paid by Australian entities on their foreign debt and equity liabilities. The lower average yield paid on foreign debt liabilities reflects a combination of declines in Australian interest rates and an increase in the share of Australia's foreign debt attributable to the Australian Government, which pays a lower rate of interest than private sector borrowers. The decline in the average yield paid on foreign equity liabilities was largely due to declining profits for Australian resource sector firms over the period in question, as these firms have a relatively high degree of foreign ownership.

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