Discuss measures to reduce an imbalance in the current account?

One way a government might try and reduce an imbalance in the current account is by using contractionary fiscal policy·        Reducing government spending and increasing taxes·        By reducing government spending, you are directly reducing AD (show on diagram)·        This is because less spending on projects means that less workers will need to be employed, and so those workers will have less incomes and will consume less, reducing AD·        This leads to the negative multiplier effect, as firms will subsequently have less profits and thus will invest less, further reducing AD·        Reducing AD means that prices fall (link to diagram)·        Lower prices makes exports more competitive·        Increased demand for exports, improves CA deficit·        Furthermore, an increase in tax, e.g. income tax, would reduce disposable income for consumers·        This reduces demand for imports, as consumers may not be able to afford them·        And so further reduces the deficitHowever…·        There is huge cost in using contractionary fiscal policy as it leads to a reduction in economic growth·        Reducing spending and raising taxes means that people have less incomes and will thus spend less, causing the economy to stagnate and slowdown in its growth·        Will also cause a reduction in employment·        Is fixing the CA deficit worth the reduction in growth?Another way the government might improve the CA deficit is by using supply side policies·        The government could invest in education and healthcare, e.g increase spending on the NHS or build more schools·        By increasing spending on health care, it means that workers will take less days off work being sick, as the treatment they receive will improve and thus their recovery time will also improve·        This increases productivity, which reduces unit labour costs for firms·        Lower costs means that firms are able to set lower prices, increasing their international competitiveness·        This would increase demand for exports, improving the CA deficit·        By improving education, you are improving the skills of the workforce, which would also improve productivityHowever…·        Could cause a budget deficit, or the government might have to increase taxes to finance the spending·        So the government has to consider if the trade-off is worth it, especially because there is significant time lag between when these policies were introduced to when they will have an effect on the economy. e.g increasing education now will only improve productivity for the next generation, and so doesn’t solve immediate problems.