It’s there; it’s hanging over our heads, no matter how much Ed Miliband forgets to mention it in his speeches. Chancellor George Osborne must have nightmares every time the word “deficit” is mentioned nowadays. You could write books on the topic, but I have near 600 words to cover a selection of the issues – I wonder who has the more pressuring task; Osborne or me.
The UK has an enormous current account deficit – the gap between the income paid to, and received from, the rest of the world. Following the revised figures for the third quarter, which showed that the economy had grown, but not as well as first analysed, the deficit currently stands at around 6% of the nation’s GDP. This means that it has been above 5% of the GDP for over a year now – uh oh.
Why does this matter? It matters because as a result of this enormous gap, paying our way in the world leaves us with the embarrassing options of either borrowing more money and shipping in more debt (the UK’s borrowing hit a height of £99 billion last year) or selling our assets on a large scale. Talk about Sophie’s choice.
Another crucial impact relates to the UK’s total debts – covering household, business, financial and government. All at a high level currently, it becomes near impossible to reduce these burdens when there is a current account deficit of this nature looming over the country.
Despite me shelling out the bad news constantly during this piece, it must be stated that not all the trends are negative. Trade deficit – the difference between the value of goods and services we export around the world against the value of those we import – has been reducing, fairly significantly since the fall in oil prices. This type of deficit is not unusual for the UK because of the tendency to consume more than we produce and to import more than we export. Being a nation dedicated to the tertiary industry, the trade deficit is usually offset against a surplus in the supply of services which, thankfully, has still been increasing – to think the deficit could be even larger otherwise.
Having said that, the big hole in the current account isn’t about trade, it comes mainly from primary income – largely the balance between the income we receive on our investments abroad and what we pay out to foreign owners of investments in Britain. For a long time, we enjoyed a surplus here, but mid-way through 2012, the tide turned and we have swung from a surplus, to a deficit of 3.5 % of GDP in this area. What on earth is going on?
The flat-lining Eurozone has meant UK investments in the region have been receiving progressively worse returns. The bad news (yes, there’s MORE bad news) is that the Eurozone doesn’t look set for miraculous recovery any time soon either. Annoyingly, our primary income balance with countries outside the EU went into a deficit of £2.3 billion, from a surplus of £2.4billion. Combining the two, it appears that we are unable to generate a net profit on our investments, anywhere. Awesome.
Relating to our earlier mentioned options, it seems as though selling our assets might be a potential silver lining, due to the increase of profits from foreign-owned companies. However, if this deficit continues to grow, the rest of the world are eventually going to question our ability to pay things back. At its absolute worst, foreigners will not even want to hold the sterling and the pound would plummet.
The Tories have put the deficit as their key theme heading up to the general elections, so hopefully the situation is set for change. It’s about time Britain stopped being that naughty student who keeps letting their overdraft get too big.
By Dre Efthymiou