Double deficit (economics)

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An economy is deemed to have a double deficit (also known as a twin deficit) if it has a current account deficit and a fiscal deficit. In effect, the economy is giving claims on domestic assets to foreigners in exchange for foreign-made goods. Traditional macroeconomics predicts that persistent double deficits will lead to currency devaluation/depreciation that can be severe and sudden.

In looking at the twin deficit graph as a percentage of GDP, it is clear that the budget and current account deficits of the United States did move broadly in sync from 1981 until the early 1990s, but since then, they have moved apart. Thus, data confirms that as a government budget deficit widens, the current account falls, but the relationship is complicated by what happens to investment and private saving.

CA = (private)S - I - (G-T)

Current Account = Private Savings - Investment - (Government Expenditures - Tax)

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