The UK Balance of Payments

The UK Balance of Payments

Although the capital account is important, when economists talk about a trade deficit or a balance of payments deficit they are referring to part, or all, of the current account. It is the current account that measures whether a country can 'pay its way' in the world and so it is of more interest to economists.

The UK usually has a current account deficit. This means that the capital account is usually in surplus. The reasons for this are covered later in this Learn It. First of all, let's look at some recent trends in the all-important current account.

The table below gives you some idea of the UK's strengths and weaknesses when it comes to trade with the rest of the world. All figures are in billions of pounds.

Year Balance on goods Balance on services Investment income balance Transfer balance Current account balance
1980 +1.4 +3.7 -0.2 -2.0 +2.9
1981 +3.3 +3.8 +1.3 -1.5 +6.9
1982 +1.9 +3.0 +1.5 -1.7 +4.7
1983 -1.5 +3.8 +2.8 -1.6 +3.5
1984 -5.3 +4.2 +4.3 -1.7 +1.5
1985 -3.3 +6.4 +2.3 -3.1 +2.3
1986 -9.6 +6.2 +4.6 -2.2 -1.0
1987 -11.6 +6.2 +3.9 -3.4 -4.9
1988 -21.5 +4.0 +4.6 -3.5 -16.4
1989 -24.7 +3.7 +3.5 -4.6 -22.1
1990 -18.7 +4.0 -0.6 -4.3 -19.6
1991 -10.2 +4.5 -2.0 -0.7 -8.4
1992 -13.1 +5.7 +2.1 -4.8 -10.1
1993 -13.3 +6.6 +0.7 -4.6 -10.6
1994 -11.1 +6.5 +7.8 -4.7 -1.5
1995 -11.7 +8.9 +6.0 -7.0 -3.8
1996 -13.1 +8.9 +8.1 -4.5 -0.6
1997 -11.9 +12.4 +11.1 -5.1 +6.5
1998 -20.5 +12.6 +14.2 -6.4 -0.1
1999 -26.8 +11.5 +8.3 -4.1 -11.1
2000* -28 to -30? +10 to +12? +4 to +8? -4 to -6? -16 to -18?

* denotes that these figures are predictions for the full year. The red figures in the 'current account balance' column highlight years of current account deficits. It should be noted that all of these figures are not adjusted for inflation. A 20 billion deficit in the late 80s is relatively worse than a 20 billion deficit in the late 90s.

A quick glance at the table tells us that the UK nearly always has a deficit on the 'trade in goods' and 'transfers' sections, but nearly always has a surplus in the 'trade in services' and 'investment income' sections. For extensive discussion on why the UK seems to have deficits in goods and surpluses in services, see the relevant sections later in this Learn-It.

Overall, the trade deficit dominates, so the current account tends to be in deficit as well. 1997 was the first year since 1985 that the UK had a current account surplus, 1998 was a year of virtual balance, but declining investment income and increasing trade deficits forced the current account back into deficit in 1999 and 2000 is predicted to be another messy year. Tim Congdon of Lombard Street Research thinks the trade deficit alone will be 25 billion pounds based on the first four months of 2000. Many thought it might top 30 billion once half the year's data was collected. You need to check data as it comes in to see if these predictions come true. All good broadsheet papers (they're the big ones!) will publish the figures as they are announced.

The surplus for investment income seems to be on a downward trend. This may be due to the fact that foreigners own more assets in the UK than UK residents do in foreign countries. In the 80s the situation was the other way round. The fact that the investment income section is still in surplus must be due to the fact that UK investments abroad are earning more income than foreign investments in the UK. But if foreigners keep investing more money in the UK (which is a good thing for other reasons - see later) than we do abroad, this section of the current account could slip into deficit, and then the only section of the current account in surplus will be 'trade in services'. Very worrying!

An interesting trend to note over the year 2000 is the fact that the goods deficit with EU countries has been less than the goods deficit with non-EU countries, despite the fact that the pound is relatively strong against the Euro. This is due to the fact that the EU economy is improving, whereas non-EU countries are faring less well (the USA particularly is growing less quickly). Whilst manufacturers complain about the strong pound, it seems that the strength of the economies into which they export is a bigger factor.

It should also be noted that rising imports is not a bad thing if they are used to enhance the domestic production process. There has been record growth in the imports of computers, semi-conductors and high tech products, which will all help to add value to UK production. Imports are rising at an annual rate of 2.2% from the EU, but 21% from non-EU (TVs and videos, but also things that help UK manufacturing).