Progressive Money

Economics in the Real World · scenario 8 of 10 · about 12 min

“Australia needs foreign investment because it is running out of money.”

Why people make this argument

For decades Australians have heard that the country relies on foreign capital: overseas investors own mines, buy government bonds and lend to banks. It is easy to read that as a sign that Australia lacks money of its own.

The strongest version of the argument is about saving, not money. Australia has long had more worthwhile investment projects, such as mines, gas plants and infrastructure, than its own saving could fund, and foreign investors filled the gap. Without them, the argument goes, investment, jobs and incomes would have been lower, or Australians would have had to save more and consume less.

Ideas you'll need

  • The current account and the capital account
  • National saving and investment
  • The currency of foreign liabilities
  • Australian dollars versus foreign currency

What isn't in dispute

The current account balance equals national saving minus investment, and is matched by the capital and financial account. From the early 1980s Australia ran current account deficits of around 4 per cent of GDP for about three decades, funded from overseas. It moved into surplus in mid-2019, and was in deficit by $27.2 billion in the June quarter of 2026.

Net foreign liabilities were $638.9 billion at 30 June 2026. Around three-quarters of Australia's foreign liabilities are in Australian dollars, and in May 2026 non-residents held just over half of Australian Government Bonds.

How mainstream economists would analyse it

The government and most mainstream economists describe foreign investment as supplementing domestic saving: without it, DFAT says, production, employment and income would be lower. Treasury's foreign investment policy adds that it creates skilled jobs and improves market access, productivity, competition and innovation, while proposals are screened against the national interest.

On this view, Australia attracts foreign capital not because it is running out of money but because its investment opportunities have often exceeded what Australians chose to save. RBA analysis says exactly that about the decades of deficits. 'Money' is the wrong word: what foreign investors provide is the use of real resources, such as imported equipment, and the foreign currency to buy them. Concerns taken seriously include dependence on investor confidence and national security in sensitive assets.

How MMT economists would analyse it

MMT economists agree Australia is not running out of money, and go further. The Commonwealth issues the Australian dollar and never needs foreign investors to fund its own spending. Foreign purchases of Australian bonds reflect foreigners' wish to save in Australian dollars, the mirror image of the current account deficit.

In Warren Mosler's framing, a current account deficit means the rest of the world is sending real goods in exchange for Australian financial assets it chooses to hold, which is a benefit. What foreign investment can genuinely provide is access to things Australia does not produce, such as specialised equipment and know-how, and the foreign currency to import them. Fadhel Kaboub stresses that this external dependence, not domestic money, is what constrains poorer countries that must import food and fuel.

Your turn

Your turn: Explain why Australia attracts foreign investment, correcting the 'running out of money' framing. What genuine benefits and risks does foreign investment bring?

Show a model response and the rubric

Australia is not running out of money. The Commonwealth issues the Australian dollar and borrows in it, and most of the nation's foreign liabilities are in Australian dollars. The 'money' framing confuses Australian dollars with national saving and with foreign currency.

The accounting is clear: when Australia invests more than it saves, it runs a current account deficit and foreigners add to their holdings of Australian assets. For three decades that was the norm. A mainstream economist would say foreign capital supplemented domestic saving and brought skills, technology and market access. An MMT economist would agree the government does not need it, and would describe foreign holdings of Australian assets as foreigners choosing to save in Australian dollars.

The genuine benefits are real: imported equipment, expertise and foreign currency for imports. The risks are reliance on investor confidence, a sharp fall in the dollar raising import prices if appetite fades, income flowing overseas, and foreign control of strategic assets. My view assumes Australia keeps borrowing mainly in its own currency; a rising share of foreign-currency debt would make me more cautious.

A strong response

  • Distinguishes Australian dollars, national saving and foreign currency
  • Uses the identity linking the current account to saving and investment correctly
  • Notes that most of Australia's foreign liabilities are in Australian dollars
  • Presents mainstream and MMT accounts of why foreigners invest fairly
  • Identifies genuine risks, such as exchange-rate falls, income paid abroad and strategic ownership

There is no single right answer. Reach your own conclusion, and be ready to say what evidence would change it.

Limitations and counterarguments

Saying foreigners simply 'choose to save' in Australian dollars can understate how quickly that choice can change: if investors pull back, the dollar can fall sharply and import prices rise. Matías Vernengo and Esteban Pérez Caldentey, heterodox economists sympathetic to MMT, argue that balance-of-payments constraints limit fiscal space even for currency issuers, especially developing countries. Foreign ownership also means income flows overseas: in the June quarter of 2026 the net primary income deficit, mostly interest and dividends paid abroad, was $21.9 billion, most of the current account deficit.

On the mainstream side, 'supplementing saving' can be used to justify almost any foreign purchase, and the national interest test involves judgements about security and control that economics alone cannot settle.

Revisit Real Terms Of Trade: Imports are a Benefit, Exports are a Cost · Whose interest does the IMF really serve? Fadhel Kaboub explains · Bill Mitchell: Demystifying Modern Monetary Theory · RSA ANIMATE: Economics is for Everyone!

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