External stability can be considered a measure of australia's long-term viability.
I'll try give u an analogy. If person A spends more than they earn, consistently (ie M > X), then there are 2 things they can do. 1 - they can borrow money from the bank. or 2 - they can sell assets. If they borrow money, they will eventually have to repay both the loan and the interest - which can only really be done once they start earning more than they spend (otherwise they have to keep borrowing, or selling assets). IF they sell assets, then any income they may have made from the assets (e.g shares) they have now lost. If they keep selling assets, ultimately their ability to earn income in the long term is diminished.
If i told you person a was spending $10 more than they earned, you wouldn't know how bad that was until you knew whether they earned $8 or $100. It's not so much the nominal amount that is important (since nominal amounts change as GDP and inflation increases), the constraint is on what the debt represents as a percentage of income. Thus the comparison of CAD with GDP. GDP is really Australia's annual income.
Trends...well the CAD was exacerbated by the budget deficits of the 80s-early 90s (twin deficits theory). If the government is drawing down national savings to finance its spending, and borrowing from overseas, then not only must more debt repayments be made, but the expansionary fiscal policy encourages demand for imports and thus worsens the trade balance. At the moment, there is a policy of "fiscal responsibilitY" - aiming to keep the budget in balance over the course of the business cycle. The Howard govt is devoting some of its surpluses to retiring debt, which does have the effect of reducing what we own on loan repayments. I'm not sure of the figures, but conceptually though, this isn't so great, because a lot of the surplus money is coming from the sale of assets - which although reduces our debt, also reduces our assets, so our net liabilities haven't been declining too much and may ultimately hinder future earnings capacity for the govt.
It is generally considered a problem once the CAD reaches 5% of GDP. This is because in order to finance the deficit, the economy needs a high rate of growth, but a concomitant effect of that increased growth is increased import spending and investment expenditure (which may be financed by overseas), and thus an exacerbation of the CAD and a vicious circle develops. This may cause the govt to cut back on spending and create some surpluses so as to raise the level of national savings - (i.e contractionary govt policy). This means that the CAD then imposes an external restraint on the level of growth that australia can sustain.
