Deficit is no problem

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The Independent Online
It really is beginning to look as though Britain no longer has a balance of payments problem. That may sound a politically incorrect statement - Britain, according to popular wisdom, always has a problem with its current account - but if you believe the latest balance of payments figures, the deficit has shrunk to such an extent that it is no longer a constraint on economic growth. If you do not believe the figures, it is even possible to argue that there may be no current account deficit at all.

The best place to start is the private sector current account. It may come as a surprise to many people, but according to these latest numbers, our private sector no longer has a deficit on the current account. There was an overall deficit of pounds 1.6bn for the third quarter, but that was entirely accounted for by the public sector: the net cost of our payments to the European Union, the cost of keeping our troops in Germany, overseas aid, running foreign embassies and so on also came to pounds 1.6bn.

Now of course it could be argued that we have to pay these dues - that for whatever reason we have to continue to help defend Germany and foot some of the bill for inefficient French farmers. But the private sector is in balance.

Next, it is worth noting that despite a reasonably strong recovery, the current account is not deteriorating. This is a little surprising, for one of the enduring features of the British consumer is the ability, when given a little more money, to rush out and spend it on imported goods. Imports are rising but so far there is no take-off, while exports, despite recession on the Continent, are performing well.

But the really bright star is the excellent performance by private sector invisibles. Financial services are doing particularly well, with the insurance cycle - which has been working against the City for two or three years - now turning up. Meanwhile, net portfolio investment income is now running in surplus at an annual rate of just under pounds 9bn a year, which suggests that the investment management skills of the City are bringing an important practical return for the UK.

These skills are also improving the net asset position of the country - the value of our assets abroad exceeds the value of foreign-owned assets here by pounds 44.4bn. This figure is well down from the peak of more than pounds 100bn in 1986, but it has climbed from a small negative in 1990. Despite running a current account deficit, we are managing to rebuild our overseas assets. True, this is in part a function of the devaluation of sterling, and in part the rise in foreign stock markets. But even without devaluation, the balance would be improving, as it did in 1991. In theory at least it would be possible to run a current account deficit indefinitely, providing we were able, by wise investment, to earn enough to cover the gap.

In any case, we may not be in current account deficit at all, for the figures do not add up. To see this, look at the current accounts for all the OECD countries, the main industrial nations, and add these together. Last year these showed an overall deficit of dollars 42bn, say pounds 30bn. In fact the OECD countries ought to be in broad balance, maybe even in surplus, for the developing world is probably in deficit. Assume the OECD nations are in balance and allocate that pounds 30bn between them in rough proportion to their share of visible and invisible trade: we get pounds 3bn.

Take those third-quarter figures, which show a deficit of pounds 1.6bn. Multiply by four to get the annual rate: pounds 6.4bn. So nearly half this apparent deficit can be explained by allocating to us the pounds 3bn we get from this black hole in international accounts.

As for the remaining pounds 3.4bn, that is well within the margin of error of the Central Statistical Office's calculations, for it usually discovers a couple of billion of extra invisible earnings when it revises the accounts a year or two later. Much of what the CSO identifies as a capital inflow may be inward income brought here for their current consumption by rich individuals who have chosen to locate in the UK.

This may seem a slightly flip analysis of such an earnest and important issue as Britain's current account deficit, and of course it is. But the general message - that the current account deficit, if it does exist, is so small as not to matter - is surely correct. What really matters is what happens next.

Here one heads into the realm of complete speculation. The official forecasts (such as the new one from the OECD yesterday) suggest a continuing deficit of just about acceptable proportions. But these third-quarter figures suggest a rather better outlook.

A combination of subdued import demand, solid but not exceptional export growth, and a continued excellent performance from invisibles could easily push us into current account surplus by the second half of next year. That would be current account surplus on the official statistics, without allowing for the statistical black hole noted above.

Of course this may not happen. What is surely undeniable, though, is that at its worst the current account deficit is acceptable, and at best it does not exist at all. Either way, it is not a problem.

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