Current account deficit means excess of imports over export. How does tax cut will result.in current account deficit….. I.e. it is clear that tax cut will bring increase in domestic investment but how does it effects export and import…..
Whether it can be interpreted as below… As the tax cut there will be increase in saving which will result in higher import resulting in higher current account deficit….
A tax cut can potentially lead to a current account deficit if it stimulates higher levels of imports relative to exports.
When taxes are reduced, consumers and businesses typically have more disposable income, which can lead to increased spending on imports of goods and services. At the same time, a tax cut can also encourage domestic production and investment, which can increase exports. However, if the increase in imports is greater than the increase in exports, the result may be a current account deficit.
Additionally, a tax cut may also lead to a reduction in government revenue, which can make it more difficult for the government to finance its expenditures. This can potentially lead to increased borrowing from foreign lenders, which can further widen the current account deficit.