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View from City Road: Britain in the pink

Britain's balance of payments deficit in 1992 was nearly pounds 3bn smaller than first thought, according to figures from the annual 'Pink Book' published yesterday. The Central Statistical Office now estimates that Britain had a current account deficit of pounds 8.6bn last year, down from its previous estimate of pounds 11.5bn. This followed a pounds 7.7bn deficit in the year before, pounds 1.4bn larger than first estimated. The revisions are the biggest for years.

The main problem, as always, is that the balance of payments is the small difference between two much larger numbers. The bulk of the 1992 revision stems from higher-than-expected net inflows of interest, profits and dividends from investments overseas. Part is the result of big losses by overseas investors in Lloyd's, with last autumn's currency turmoil also making the provisional figures for portfolio investment unusually unreliable.

Measuring these flows of investment returns has always been difficult, especially since exchange controls were abolished in 1979. The abolition of customs controls within the EC at the beginning of this year means the figures for trade in goods will now also have to be taken with a large pinch of salt.

But these difficulties do not obscure the underlying problem with Britain's trade account. Uniquely for a post-war recession, the economy has been unable to escape from deficit despite depressed import spending. In the short term, foreign investors will finance the deficit by lending money or buying our assets. But their appetites for sterling are finite. And the deficit is likely to swell as the recovery gathers pace.

A sustainable recovery will have to be built on investment and exports, with consumer spending remaining much more subdued than it did in the 1980s. This rebalancing of the economy requires a further rebalancing of policy: low interest rates and a competitive exchange rate, combined with higher taxes and cuts in public spending. Any other course will put the recovery itself at risk.