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Foreign deficit from the inside, or where savings we import are going

  When a country presents a deficit in its current account balance, this is because it is living beyond its means. It is spending more than it produces, and, as happens in a household or a company, it must resort to borrowing in order to maintain its rate of spending. At times, this is good if it happens to be a developing country which presents a broad growth potential and concentrates its spending on investments that will pay off in the future and increase its growth capacity. It is not usually so good if the imbalance arises from mere consumer spending so that there is an increasing debt (which must be paid back in the future) in order to pay for current spending. It may be a case of «eat today and starve tomorrow».

  Spain’s economy is suffering from a run-away trade deficit which is bringing about a growing gap in the current account balance. We are spending more than we earn. In order to maintain this imbalance, we must borrow more and more from abroad. That is to say, as the balance of payments has to be settled, the figures in the red arising from current transactions must be compensated by capital inflows. It should be pointed out that Spain has no problems in obtaining finance. Being within the euro area has radically changed the traditional picture of Spain’s economy which formerly found getting foreign financing to be an insuperable bottleneck. In spite of everything, however, we should be asking if it is sustainable to have increasing recourse to the surplus savings of other countries.

  In order to help clarify this key problem, we must break down this borrowing into the different segments of the national economy. This breakdown of net borrowing of the private and public sectors comes from the financial accounts of the Bank of Spain. In 2004, this net borrowing amounted to more than 30 billion euros to stand at 4.2% of the gross domestic product, a figure which coincides with the current account deficit plus capital transfers in the balance of payments. Up until a few years ago, the usual scheme of things was, on the one hand, households, which used to provide a very substantial surplus to the rest of the economy thanks to the fact that home acquisition (the only investment spending by households) was well below gross savings, that is to say, lower than whatever income was left over after paying consumption costs. In addition, there were the non-financial corporations whose position with regard to the rest of the economy changed according to the current economic situation. Finally, there was the public sector with continuing deficits which involved huge borrowing requirements. The sum of these three factors, plus the position of the financial institutions, meant a positive or negative foreign balance depending on the then current situation.

  In recent years, this pattern has changed. As may be seen in the accompanying graph, the public sector has corrected its deficit and now does not need to borrow. On the other hand, companies have moved into the negative area with net borrowing close to 5% of the GDP. The most notable change, however, is that households have followed a similar path so that in 2004 all of that sector’s surplus had practically disappeared. That is to say, correction of the government imbalance has not been sufficient to compensate for the major worsening of the private sector’s financial position. What then brought about this trend in the private sector?

  The answer is investment. The figure for gross household savings has dropped but the main change is that households have swung heavily into buying homes, stretching their capacity to the hilt. Something similar is taking place in the case of companies. They have slightly reduced their savings while at the same time increasing investment, within which investment in construction is very substantial. The drop in interest rates and the spiralling rise in land and housing prices are among the reasons for this trend.

  If the foreign deficit were due to an increase in investment, this deficit could be seen with good eyes. But to the extent that it is exclusively because of the construction component, the verdict must change. In 1995, the specific weight of capital goods in the GDP was 6.0% and went up to 6.7% in 2004. On the other hand, in the same period construction went from 12.3% to 16.2%. In today’s globalized world, investment in information technology and communications is said to have the greatest future. On the other hand, investment in housing would not seem to be raising the future growth potential of Spain’s economy.

  With regard to companies, a good part of investment is also going into activities linked to construction. But now it would be most relevant to ask questions about the low capacity of non-financial companies to generate savings. Compared with what is happening in the United States, for example, where corporate savings is quite positive, we could point to the insufficient ability to boost productivity as an explanation of this discrepancy. Finally, the increasing need for funding arises from the growth model followed in recent years, a model characterized by a low capacity to improve productivity in the case of industry and excessive investment in the construction sector.

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