Sectoral balances, savings and investment in Solomon Islands

From the principles of national income accounting, which require ultimately a balanced set of double-entry accounts, a deficit in any one of the public, private and overseas sectors must be offset by a net surplus in the other two. If private savings are insufficient to finance the government deficit and private investment—that is the nation as a whole spends more than it earns—it becomes indebted to the overseas sector by running a current account deficit. The current account is part of the balance of payments, which also includes the capital account and change in reserves, and the balance of payments must (by definition) be in balance. Thus, a current account deficit must be financed by a capital account surplus (and if not, then by some loss of foreign reserves), leading to an increase in net claims on the economy by the outside world.