Mobile phone fraud adds £11bn to UK's trade gap with Europe

The Government was forced to admit yesterday that a multi-billion mobile phone fraud had pushed the UK's already huge trade deficit even further into the red.

The Office for National Statistics said imports into the UK from the European Union were as much as £11bn a year higher over the past four years than first thought. This meant that Britain's trade deficit last year hit £4.5bn or 4.5 per cent of GDP - its largest shortfall since the peak of the last economic boom in 1989.

Analysts said the revisions could prevent a cut in interest rates today as the Bank of England would be keen to analyse the impact in its key quarterly Inflation Report published next month.

Meanwhile, the latest monthly figures showed the deficit widened in May as exports to the struggling European economies fell at the fastest rate for four years.

The revisions follow a massive investigation by Customs and Excise into the fraudulent imports into the UK of mobile phones and computer chips by organised criminal gangs. The fraudsters set up a business to take advantage of VAT-free import from other EU states and then sell the goods on within the UK without paying any tax.

The business is then shut down before tax officers spot the discrepancy. The goods are often then exported again - which is picked up in the trade figures - before being covertly imported again.

Last week Customs and Excise released details of one of its operations to crack down on the scam. After swooping on more than 70 premises in the UK and Spain, 39 people were arrested on suspicion that they have taken part in a mobile phone fraud estimated to have cost the UK Treasury £120m.

The Government admitted last year such fraud cost the Treasury £2bn. Customs officers said the goods were sometimes imported and exported as many as 35 times before being sold into the legitimate economy.

Yesterday the ONS published estimates of the volume of trade "lost" because of the missing VAT payment. It said import volumes were £1.7bn higher in 1999, £2.8bn in 2000, £7.1bn and £11.1bn last year:£22.7bn in total, or a rise of 5.5 per cent, in four years.

This pushed last year's trade deficit from £35.2bn to £46.3bn, or 4.5 per cent of GDP. It also had the effect of doubling the UK's current account deficit - which includes trade in services and invisible earnings - from 1 per cent to 2 per cent of GDP.

The biggest impact is on trade with the European Union, which has risen only slightly between 1996 and 2002 - from £4.6bn to £9.7bn - despite the surge in the value of the pound, baffling City economists. The new revisions mean the deficit with the EU has plunged to £20.8bn. Michael Saunders, a European economist at Citigroup, said: "These revisions resolve the apparent puzzle over the limited deterioration in the UK's trade balance with other UK countries." The revisions will force significant changes to estimates of GDP growth that could effect monetary policy, analysts said. John Butler, a UK economist at HSBC, said: "The Monetary Policy Committee may want to keep rates on hold this week so that they can re-assess at the August Inflation Report."

On their own the huge deficits could slash estimates of economic growth from 1.9 to 1.0 per cent for last year and from 2.1 to 1.3 per cent for 2001. But the volumes of extra imports mean that consumption would also be revised up and the ONS said the impact on GDP this year would be negligible.

However, Mr Butler said the changes raised wider questions for the Bank, as it made the divide between strong domestic demand and weak net trade even starker.

Trade had been even harder hit by the strength of sterling than previously thought while, in terms of inflation, imports may have played an even greater role in curbing price rises than previously thought. "Initial reactions suggest that the economy is more imbalanced and hence more vulnerable than we thought," he said.

This was echoed by the latest figures that showed strong demand for imports but falls in exports to the US and eurozone, pushing the monthly deficit from £3.3bn to £4.1bn.

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