Is the UK’s balance of payments a problem?

UK politics used to be dominated by the balance of payments figures. Governments would urge us to buy British, and to export to keep our jobs and maintain our living standards. Oppositions would pore over the small print of the monthly balance of payments figures, highlighting every weakness and warning of dire economic events to come if the figures were lacking in some respect.

In recent years under Labour and under the coalition the country has run large balance of payments current account deficits, importing more than it exports, with no apparent damage being done. So what has changed? Is this sustainable?

The main thing that has changed is the UK is now firmly wedded to having its own currency with a freely floating exchange rate. If we had surrendered the pound for the Euro we would have to put ourselves through tough austerity programmes to cut personal incomes, to curb our appetite for imports. That is exactly what happened in Greece and Spain, where they had substantial wage cuts in cash terms as one of the main weapons to correct their balance of payments deficit.

If we had kept to a managed exchange rate as we had in the 1960s and again under the Exchange Rate Mechanism then we would have to increase interest rates in an effort to hold up the value of the pound. This too would have enforced a kind of austerity on the country, hitting borrowers who are in the majority including the government. As rates rise so people with borrowings can afford fewer imports, and foreigners find it more attractive to deposit money and invest in the UK. Usually defending the pound proved to be both damaging and ultimately self defeating, as Labour discovered with their devaluation of the pound from $4 to $2.80 in 1949, and from $2.80 to $2.40 in 1967. In 1976 the pound fell to $1.63 under Labour as part of the IMF crisis. The devaluations then did cut UK living standards, making imports dearer and exports cheaper, to correct the balance of payments. It fell to $1.03 at its worst point under the Conservatives, but rallied strongly as more internal discipline was asserted over budgets.

So how does it work when you have a floating rate? In part it works by covert devaluation, making exports cheaper and imports dearer, as part of the adjustment. However, as we have seen, the pound has not fallen enough to correct the current account. It turns out the UK has been able to finance a current account deficit quite easily so far.

This happens by several means. Foreign buyers emerge who want to buy UK existing assets from UK people, government and companies who wish to spend more than they earn. Foreign investors also want to buy new assets which we produce to sell to them. I have commented before on the UK model of building lots of expensive flats in London to sell to foreign buyers, which has become one of our leading export industries rather like Germany selling such people top end cars. Our exports show up here in the investment flows, not the current account. Individuals and the UK government can also borrow from abroad to sustain higher consumption and investment. Some foreigners just want to deposit money in the UK banking system which helps finance us.

The present level of the current account deficit will doubtless generate both changes in the exchange rate and further substantial inflows of money from overseas. When considering changes to the exchange rate they are not necessarily all one way, as the relative valuations of paper currencies depends on considering the policies of both governments involved. The Japanese authorities and some in the Euro area wish to lower their exchange rate as a matter of policy.


  1. Gary
    December 27, 2014

    yes, instead of exporting goods that we (don’t)manufacture, we are exporting the assets of our country. We are selling off the silverware like some feudal landlord on his last legs. And to compound it, we just print money to cover any shorfall.

    And this is spun as a virtue ?! It is a disaster.

    1. Pauline Jorgensen
      December 27, 2014

      Whilst I don’t like our current account deficit, the interesting thing about UK residential property is unlike other assets you cant ship it abroad, so its not quite like selling the family silver, the only way to get the value out of the country is to sell it again so we havent really lost anything. As an aside I wonder how much property the UK population own overseas, how does that balance with foreign purchases in the UK?

      1. Lifelogic
        December 27, 2014

        Whether you ship an asset abroad or not, you have still lost use of it and any income/gains derived from it. You have to pay rent to use it or money to buy it back.

        Mind you with 12% stamp duty and 28% CGT (on non real gains) one wonders why are people still buying them at all?

      2. alan jutson
        December 27, 2014


        If the owner of a Property lives abroad, one assumes their bank account is also held in the Country of their normal residence (abroad).

        Thus if they sell that property they hold in the UK, then the money probably goes abroad as well.

        The only money that stays here, is Stamp duty.

    2. libertarian
      December 27, 2014

      Gary as always you ignore our service industry exports which are huge.

      But then you live in the wrong century and don’t understand change

    3. Mondeo Man
      December 27, 2014


      It’s gone beyond selling the family silver. We’re now selling the roof over our head and going into rented.


      If our people have to buy their homes back at an unbelievably inflated price or become renter serfs at an inflated price… This is happening now.

      Half a million no longer buys much in London.

    4. petermartin2001
      December 28, 2014

      “It is a disaster”

      Well it could be a viewed as a disaster by younger people who are being priced out of the housing market. But we could introduce laws to prevent non-citizens buying up properties in the UK. Many countries do have such laws.

      One problem with running a persistent trade deficit is that citizens and companies of overseas countries end up with our currency, ie pounds, which they may like to spend in ways which do not suit us.

      For example, cashed up foreign countries would be very welcome , I’m sure, to spend some of these pounds buying aeroengines from Rolls Royce. But what about buying Rolls Royce itself? The Americans have the same problem with their big companies. Like Boeing. Nearly everyone would be welcome to buy Dreamliners but not the company itself. The Americans wouldn’t allow it. Neither should any British government be prepared to allow the unrestricted sale of the Rolls Royce company.

      That’s how it should work with land and property too. That’s not to say there should be a total ban but nevertheless a legitimate need, other than property speculation, has be shown. It makes no sense to allow properties to remain empty for extended periods of time. Councils end up collecting no property tax. Local businesses are deprived of their customers. UK citizens are deprived of living space.

  2. Lifelogic
    December 27, 2014

    Large balance of payments current account deficits and a country importing more than it exports is simply not sustainable. You can only sell things off (like Businesses, Knightbridge & Chelsea) once.

    The UK & Cameron’s pathetic Libdem government has benefited from the worldwide troubles, the Arab spring and the EURO disaster (inflicted by the EU on its unfortunate residents). These have driven money and the rich towards London and the UK. In the long run however we will still have to trade. To do that we have to have something to sell (tangible or intangible) that others will actually want to buy. Then we can use that to buy the gas, oil, trucks, 747s, building materials…….. we need. Without that a weak currency will follow as night follows day.

    The government has expensive energy, daft employment laws, poor schools, poor health cars, poor roads, a dreadfully inefficient, bloated and incompetent government, over taxation, over complex taxation and endless silly rules and restrictions that simply prevent the UK competing in so very many areas.

    What is the UK actually still competitive in? Financial services is under direct attack by the EU and government over and misdirected regulation. In manufacturing we have very few world class companies even Dyson, Rolls Royce and BAe systems seem to be reducing their activities in UK. They are probably very sensible, this government (and the next) are clearly against any real industry in the UK. Hence the expensive energy religion, silly employment laws, a poor legal system. They seem determined to kill the golden goose by over taxation and misguided over regulation. More likely it will just continue to migrate abroad.

    1. Stephen Berry
      December 27, 2014

      “What is the UK actually still competitive in?” Phrasing the question in this way and following it with a list of UK-owned companies only invites confusion. The question should be, “What are companies and individuals located in the UK actually still competitive in?” For instance, there are many foreign owned car companies in the UK exporting cars around the world. The fact that they are foreign owned does not prevent the workers’ wages getting paid or further investment being made in plant in the UK.

      Given that the UK’s GDP has just surpassed its pre-recession peak, one must suppose that here and there on these islands things are being produced which people want. In areas like banking, insurance, publishing, pop music, electronics, engineering and information technology, there seem to be individuals who happen to reside within the UK and continue to display some ability in their chosen field.

      As for the old Balance of Payments chestnut. I suspect that much of the ‘gap’ is down to the fact that UK overseas assets are still calculated at book value. These assets are huge and with the recent rise in stock markets worldwide will have grown considerably. Some 20 years ago, the Institute of Economic Affairs produced a well-researched pamphlet claiming that UK overseas assets registered at book value massively underestimated their true current value.

      In 1939 it has been calculated that 25 per cent of British imports were paid for from the return on overseas investments. Can we be returning to that happy position?

      1. forthurst
        December 27, 2014

        If one examines the GDP per capita of Northern Europe (excluding the Baltics), then the UK is at the bottom of the list; this is in part because when an Englishman adds value in a foreign owned factory, the profit goes walkies. It is the countries which own their own major businesses, like Germany that are doing better than us, despite the substantial contribution from Banksterism in which money is created out of thin air and paid out as bonuses for hypothetical profits brought about by buying derivatives. A country which does not control its a major business may not be involved in design of either product or plant or the ultimate location of a manufacturing facility; of course, we do have some world class companies such as Rolls-Royce, which, bizarrely, is not run by an engineer but an accountant, so how long it remains world class remains to be seen.

        1. Stephen Berry
          December 28, 2014

          The Financial Times, July 20th 2014 has a story “UK attracts record number of foreign investment projects.”

          “This follows a survey by EY, the professional services firm, which found that Britain had extended its lead as Europe’s top destination for global investors.

          The data confirmed that the UK has continued to recover from a post-recession dip, helped by cuts in corporation tax and measures such as the “patent box”, which allows for a lower tax rate on some intellectual property.

          The UKTI report said 66,390 jobs were created, the most since 2001. In total 1,773 investment projects were set up by foreign businesses. That included 122 projects in Scotland, creating 5,374 jobs.”

          Later on the same piece says, “Investments included Indian-owned Jaguar Land Rover’s plan to add 1,700 jobs to its factory in Solihull and China-based Trina Solar’s completion of a photovoltaic power plant in Cornwall. Canada’s Bombardier Aerospace created 250 jobs in Belfast and Germany’s BayWa Re built a solar power plant near Oxford.”

          Companies with any sense will invest, not on grounds of national sentiment, but where they can make a return.

    2. fedupsouthener
      December 27, 2014

      Agree. Our current energy policy will drive this country into the ground. How can the government expect to have a healthy export market with future high energy costs? JR, just what is the government expecting to do with the shale gas it is saying it wants to find???? Export it all when we are not longer allowed to use gas cookers, boilers, diesel and petrol cars etc. How do they think ordinary people are going to afford to change over from gas to electricity and where is the energy needed for this going to come from? Perhaps you can answer this.

  3. alan jutson
    December 27, 2014

    The UK balance of payments is a problem, but has not yet been highlighted as in previous decades, because so many other Country’s are also in the same overspent position.

    Just where do the people with money invest, if it is not in a relatively stable country such as the UK.
    The choice is small.

    You are correct John, we get away with it at the moment via stealth devaluation and re-valuation every day.
    Daily revaluation is a fact of life, but not a solution, we need to balance the books for long term survival.

  4. Richard1
    December 27, 2014

    The BBCs Robert Peston, a known leftist, has latched onto this one as a new line of attack on the Conservatives’ economic record. I heard an ‘interview’ with him (do other people find the BBCs habit of interviewing their own journalists irritating?), in which the revision of 2014 growth down from 3% to 2.6% was being presented as a massive reverse for the govt. Mr Peston made a series of (obviously unchallenged) assertions about how we aren’t ‘paying our way’. None of the counter balancing flows were mentioned and there was no question as to why this is a problem. In a free trade world (not that we have one yet) its not obvious why current account deficits on the balance of payments matter.

    1. Brian Tomkinson
      December 27, 2014

      I agree; the BBCs habit of interviewing their own journalists is not just very irritating, it deliberately introduces bias. Often this happens when another person is also interviewed, normally taking the opposite stance to that of the BBC journalist. No doubt the BBC consider this as their idea of ‘balance’. (The Agreement accompanying the BBC Charter specifies that they must do all they can “to ensure that controversial subjects are treated with due accuracy and impartiality”.) Needless to say, the interviewer is less challenging to their own staff than to an outsider. However, since many listeners and viewers may well still cling to the naive view that the BBC is truly impartial, when they hear the BBC reporter’s subjective interpretation of the facts, rather than the plain, objective statement of facts, they may well be inclined to side with the BBC’s version of events. As a public service broadcaster the BBC is failing in its duty of inpartiality and objectivity on a daily basis.

      1. Lifelogic
        December 27, 2014

        “to ensure that controversial subjects are treated with due accuracy and impartiality” Yeah sure.

        No much by way of impartiality on the Global Warming Armageddon Religion from the BBC. They can hardly make a single program without endless mentions of climate change and pictures of extreme weather (as if weather was some new thing). The BBC’s science presenters all seem on message re. climate change. They should know better especially the physicists.

        The BBC also seem very keen on trains, electric cars and bicycles (for some irrational reason or other) this despite the fact that trains get closed down at the drop of a hat on peak travel days as we see at Kings Cross today. Also despite the fact that these transport methods clearly have few environmental advantages, on balance over efficient, cheaper, door to door and far more convenient cars.

        1. fedupsouthener
          December 27, 2014

          Absolutely right there Life logic. I can’t watch anything with David Attenborough anymore. Also Countryfile. All going on about climate change. I just wait for the phrase and then turn over. The BBc had a programme last year called The Wall. The object was for the public to send in their pet hates and the one issue that got the most mentions would be discussed on the programme the following week. Wind farms got to the top of the list and what did the BBC do?????? Ignore it and tell all those that wrote in that they were nimbyies. How’s that for democratic and giving the public what they want? It’s all about what they believe in and sod the British public paying the licence fee for what is mainly repeats. Christmas this year has been the worst ever.

          If they try and get us all off the roads the country will come to a standstill. The trains can’t cope now and the bus services are rubbish. Mind you, if the roads in Scotland get any worse we won’t be able to run our cars – it will be back to horse and cart.

          1. Lifelogic
            December 28, 2014

            It is yours the licence fee payers BBC as they like to say! But we get no input at all.

          2. petermartin2001
            December 28, 2014

            I must say I hate wind farms as much as you do. However banging on about how climate change isn’t real and how the scientists have got it all wrong etc etc isn’t going to get anywhere at all. IMHO.

            Wind farms are part of what I’d call greenwash. That means they aren’t going to solve anything but they make it appear that the government are doing something towards a solution. The best that can be hoped for, in the UK is that 20% of all energy can be generated from ‘the renewables’. That’s going to remain the case indefinitely unless someone comes up with a way to store energy for when the wind doesn’t blow and the sun doesn’t shine.

            So what about the other 80%? The choice has to be between nuclear power or coal. Theoretically we could remove C02 emissions from coal burning but the technology just isn’t there to do that. It’s not likely to be any time soon.

            So that leaves nuclear power. The safety record is nowhere near as bad as in the popular imagination. In fact its orders of magnitude better than coal and other fossil fuels. The particulates emissions kill millions worldwide and make living conditions in many cities almost unbearable.

            So really there is no alternative. And if we have to go nuclear, what is the point of having wind-turbines polluting the landscape?

    2. petermartin2001
      December 29, 2014

      “…its not obvious why current account deficits on the balance of payments matter.”

      They matter insofar as there is a much overlooked link, almost on a 1:1 basis, between them, the external deficits, and the internal or budget deficits too.

      Germany has recently claimed to have balanced its books, internally. It can only do that by running a trade surplus. Replace Germany’s surplus by our deficit and they too would have a budget deficit. They’d have less taxable money coming into their economy and more untaxable money leaving it.

      It’s not a difficult concept, but hardly ever mentioned by mainstream economic commentators.

  5. ian wragg
    December 27, 2014

    We can run a deficit as long as we keep selling assets. Eventually we will have nothing to sell and the currency will tank. It is only a matter of time before the bond market collapses and this can be speeded up with Milipede bin command. Witness France and Hollande.
    Very soon tyhere will be a correction in the market and a massive devaluation of Sterling probably doing more damage than 2008.
    I have just been looking at electricity output on a quiet holiday Saturday.
    On a demand of 30GW. we are generating as follows.
    Coal 36.4%
    Nuclear 24.23%
    CCGT 14.12%

    WIND 8.73%

    As the wind is fixed, as the peak rises to 50GW wind will account for about 5% this is despite there being 4 times that much installed.
    When are you and your stupid mates going to wake up to the damage you are doing to our infrastructure.
    Where is the power going to come from when you shut down the remaining coal plants?

    1. fedupsouthener
      December 27, 2014

      Ian, in essence they don’t really know. Nobody in government has woken up to the disaster looming in the UK regarding energy. Nobody is listening to the experts. They are only listening to the developers of wind and solar who are running off with the vast subsidies we are paying for intermittent power. What kind of people do we have running the country at the moment? Not one of them seems capable of understanding the damage they are doing or is that what they want?

    2. Richard
      December 27, 2014

      Electricity :

      You’re right.
      About 6 weeks ago the amount of electricity produced by wind never exceeded 4% for around 2 weeks and even went as low as 0.4% .

      How can our rulers put into law that we will cut by at least 80% our TOTAL greenhouse gas emissions (not just those caused the production of electricity) by 2050 relative to 1990 levels when the technology do this does not exist and there is no accompanying plan.

      And with an expected 50% increase in population between 1990 and 2050 ?

      1. Edward2
        December 27, 2014

        Because Richard, none of them have ever been engineers, is the main reason.

        They pass laws expecting those of us who are engineers, to suddenly invent solutions.
        Often this has happened, due to necessity being the mother of invention, but the legal requirements of the Climate Change Act are currently impossible to meet unless there is a new amazing invention.

        Nuclear has potential as it is the best current low CO2 energy source, but politicians are frightened of it, due to lack of technical knowledge.

        Wind solar and hydo are all OK and can be part of the mix if heavily subsidised by the State to make them a profitable investment but to depend on them is a mistake.

        With a rapidly growing poplulation and a rising energy demand it is likely that our current policy on energy will lead to power cuts for all.
        So in this sense we are all in this together.
        My advice is to copy many I know, who work in the energy industry and invest in a back up generator (diesel one are best) to protect your home and business premises.

        1. Richard
          December 28, 2014

          Edward2 :

          You are right.
          I am looking at fitting a generator at home because under current legislation and plans power cuts are inevitable.

          Our rulers truly intend to make our power supplies like that of a third world country with the sounds of small generators running everywhere.

          Except….that I think they will make the private generation of electricity illegal using the reason of course that these generators do not comply with CO2 emission regulations…

          I believe that if our climate change legislation is not cancelled and such power cuts take place then it will inevitably lead to rioting in our streets and social breakdown.

          Nuclear is the only sensible option – hopefully using Thorium – but there is currently no real effort to put this plan into work and I feel deeply ashamed that our country now needs to go to France and China to build them.

  6. oldtimer
    December 27, 2014

    It is worth observing that the advent of QE, at the start of the last financial crisis, was marked by flight of significant sums of foreign capital held in UK banks and a sharp devaluation of the £ (of some 25-30% IIRC). Confidence in the UK as a safe haven was shattered. As you point out tangible assets such as property or businesses with strong brand names have had a more enduring appeal than cash held in sterling.

    The problem with a changing fx rate is the effect it can have on the attitude of exporters or would be exporters. For them it represents an unpredictable element in the cost of doing business. Hedging against changes in the price of a commodity provides short term certainty but it is a two edged sword, as energy companies have recently discovered who bought forward at high fixed prices. It will not provide protection for those businesses that make big capital investments and take a long term outlook such as Roll Royce or JLR. For them long term stability is critical and a sharp appreciation of the pound would be bad news. Their hedge is to invest in their principal markets.

    1. Denis Cooper
      December 27, 2014

      Actually the sharp drops in the external value of sterling occurred BEFORE the advent of QE, not after.

      During 2007 and 2008 the sterling trade weighted index fell from an over-valued all time high of 106.8045 on January 23rd 2007 to an under-valued all time low of 73.7560 on December 30th 2008.

      After which it recovered over some months to roughly stabilise round about 80, and rather surprisingly that was not significantly affected by either the first or second programmes of QE.

      It then bumped along at that sort of level for over four years, until autumn 2013 when it started to rise gradually, and it has recently been touching 88:

      1. Gary
        December 28, 2014

        and now we know for sure that the banks have been rigging forex. So, treat those figures accordingly.

        1. Denis Cooper
          December 28, 2014

          A little rigging of certain exchange rates on some days will make no difference to the long term trends for the trade weighted index.

  7. John E
    December 27, 2014

    Of course it is a massive problem as I have commented here many times before over the years. It is the inevitable end result of the deluded post industrial service economy policies.

    Way back when QE was launched Mervyn King pointed out we had two serious deficit problems – not just governement spending but also the balance of payments.

    This government has been much too complacent in tackling both. The attitude in Whitehall is along the lines of ” We’re still paying back our Napoleonic War debt, it will all come good in the end”.

    1. lojolondon
      December 27, 2014

      Mervyn King was a large part of the problem – He was the best placed person in the UK to comment, but never made a single comment during the 13 long good years while Gordon Brown borrowed, sold our reserves and spent. He never anticipated or warned of the crash, then he did nothing to protect the economy, every action was too little too late.
      And I will never forget that he was a key member of the group of 364 eminent economists who wrote an open letter criticising Thatchernomics – published and much publicised by the BBC. Thank god she had the strength – mental and political – to stick to her guns, and Britain’s economic recovery was assured – right up to the point that Tony Blair took over. But Mervyn King’s part in that disgraceful attack was never mentioned again – part of the benefit of having the BBC onside!

      1. Mark B
        December 27, 2014

        Things went wrong when Lady Thatcher bowed to pressure and joined the ERM. She was later ousted and, in 1992, the pound was kicked out of the ERM by speculators and started a recession that ruined the lives of many. It also destroyed the long held belief that the Conservative Party could be trusted on such matters.

        1. Hope
          December 27, 2014

          Not sure she did. She said the UK could join sometime in the future. The traitors in the Tory party remain and are joined by the modernisers.

  8. Bert Young
    December 27, 2014

    Our financial services are internationally competitive and successful – adding much to our value ; manufacturing is dependent on converting imported basics , adding value and then exporting . Successful products rely heavily on R and D , innovation and choice of markets . Under-pinning both financial services and manufacturing is the quality of the education system . Any effort to bring our balance of payments into line requires the co-ordination of each of the forementioned ; it is a long term battle extending beyond the 5 year parliamentary system . Herein lies the rub . How do you keep the co-ordinated wheels turning when politics interferes ?

  9. rick hamilton
    December 27, 2014

    We run a trade deficit because we don’t make the majority of our own products anymore.

    I suspect because most of our politicians with generally ‘liberal arts’ qualifications do not know or care why this is. Facts and figures, technical terms and scientific knowledge bore them. They are interested only in words and opinions. The national narrative is all about social engineering and never real engineering.

    Read that wonderful critique of the Blair years “Fantasy Island” most of whose conclusions are still valid today, e.g. : “Thrift is not a synonym for penny-pinching, or for genteel poverty, or for miserly behaviour. It is a synonym for realistic living. By contrast, living in debt…….means abandoning reality for fantasy.”

    1. Kenneth R Moore
      December 27, 2014

      When I used to see a nice home with an expensive car outside I used to think the occupant had done well for themselves and worked hard.
      Now I just think of how the debt they are or their creditors are probably in. Same thing has happened to the British economy.

      1. Kenneth R Moore
        December 27, 2014

        how much debt

  10. Kenneth R Moore
    December 27, 2014

    For now we have been able to get by cannibalising our asset base but there isn’t that much left to sell off. Westinghouse electric was sold just as we needed more nuclear capacity.
    Most of the easily recoverable North sea oil and gas was exported cheaply to pay for tax cuts and unemployment. The list of short sighted decisions is endless.

    It seems that the current ultra low interest rates are a signal that we are now too poor to save and invest for the future – every penny and more is needed now.

    Mr Redwood won’t need me to point out the lack of sustainability of building high end flats in London to pay for his governments inability to balance the books or the economy.

    We are now effectively living on tick as cash in the form of company profits leave the country coupled with rising interest payments on borrowings. It’s a vortex that can only have one conclusion that can only be put off for so long. It was good to see Mr Redwood use the word ‘sustainable’ today.
    Yet desite our dire position, David Cameron casually promised the Scots extra money to stay in the union. The elite just don’t ‘get it’.

  11. Andyvan
    December 27, 2014

    Mr Redwood you used to have a reputation as being reasonably knowledgable about economics. How can you suggest that living on credit and printing money in order to finance unsustainable balance of payments and spending deficits can ever be desirable? What happens is that wealth is exported and we become poorer. That is evident when you compare real family wealth 50 years ago and today. Unfortunately a lot of people equate pumped up house values with wealth (despite having to pay horrendous mortgages). This country has been ruined by all governments since the end of WW2. The economic ignorance that afflicts this country has allowed special interests to direct most money to the wealthiest and export the rest to the point that Britain is amongst the top most indebted countries on Earth. Well done Westminster.

    Reply I am describing what is happening in this piece, not expressing a view on policy. I have in the past recommended that we spend less in the public sector so the state borrows less, and recommended a different energy policy relying on producing domestic energy from gas/coal/oil.These policies would mean a smaller balance of payments deficit.

    1. Kenneth R Moore
      December 27, 2014

      I do wish Mr Redwood would give us his own view on the balance of payments deficit – rather than a commentary on the current situation.
      Those that do not follow the usual media outlets realise the current situation isn’t sustainable and that the ‘end game’ or ‘2007 crash part 2’ is on it’s way. It would be interesting to hear his views on the likely timing and motion by which these events may pan out.
      I suspect though, that despite being uniquely qualified to comment, his views would be too uncomfortable for his party to read so he will sadly remain tight lipped.

    2. petermartin2001
      December 28, 2014


      If you want a smaller BOP deficit , or even a surplus, then the solution is relatively simple. Government needs to force the value of the currency, ie the pound down to a lower value. That’s what Germany used to do for many years when it had control of the DM. It could have let it rise a bit and have balanced trade or rise a bit more still, by selling Government bonds, and have a deficit like the UK. It chose not to.

      Imports would be dearer though. Petrol prices would rise etc. We would all be able to afford less and what we didn’t buy would go for export.

      Is that what you really want?

  12. Margaret Brandreth-J
    December 27, 2014

    I wonder why foreigners want to invest in the UK banking system whilst the interests rates are so low?

  13. Antisthenes
    December 27, 2014

    In a nutshell a current account deficit is the same as a family that has less income coming in than going out in the end has to either improve income and/or reduce expenditure or sell off the family silver to keep solvent. We will know when the UK is no longer keep away insolvency when we have to sell off the crown jewels.

    Of course the UK is very rich so noticing the constant drip feed of wealth loss to foreigners is not very noticeable. Although is not the constant moan these days that “so many foreigners own UK based companies and London properties”.

    You rightly point out that Labour is the biggest mischief maker when it comes to not balancing the current account. Labour in government next year will undoubtedly see a rise in the erosion of the current account as they put social engineering before prudent economics.

    1. Leslie Singleton
      December 27, 2014

      Antisthenes–Never mind the Crown Jewels, what about the Tower of London?

  14. JoeSoap
    December 27, 2014

    Despite these joyful words, if it feels wrong it probably is.

    These are the type of words which you could equally have written about RBS in 2006 – brilliantly managed, a driving force for Britain in the burgeoning financial services world etc etc. It didn’t feel right then, despite Brown’s glowing analysis that profits from RBS etc could fuel PFI schemes that would leverage the NHS into a wonderful future. Basically bullsh-t of the highest order.

    Selling flats to foreigners is just the same. Wait until the mood music changes. Mansion taxes, higher interest rates, a general move away from real estate in a Japanese-type asset deflation and you’re in trouble.

    Selling cars, machine tools and having a balanced economy with a trade deficit feels right.

    1. JoeSoap
      December 27, 2014

      trade surplus I meant, of course.

  15. The PrangWizard
    December 27, 2014

    I might look at it this way – I spend more than I earn, but I’m ok for the moment as I can sell some furniture, and then I think of a wheeze to build sheds in my garden and sell them off. One day though I run out of things to sell and there’s no more garden left.

    I read that Smith and Nephew is the latest company being eyed up by a foreign buyer. This should bring in some more money to the country, it will be called inward investment no doubt, and will be classified as ‘a good thing’. The City and its spivs will do ok, but what do they care? Lets hope there’s a very big stink kicked up, as there was with AstraZeneca.

    One day I might try to put together a list of businesses which I can recall which have been sold off to foreign owners in the last couple of decades. I know even I will be shocked. What is the total value of profits and dividends subsequently been sent out of the country? They must by now amount to many hundreds of millions of pounds, if not billions. Seems like a vicious spiral to me.

    Our overseas investments were once lauded, as their dividends would make up some of the shortfall in our balance of payments. But most of those businesses are now included in those which have been sold off.

    There is something fundamentally wrong.

  16. petermartin2001
    December 27, 2014

    The financial trade in goods and services is generally covered in the current account. Other financial flows are covered in the capital account. That’s perhaps a slight simplification and it is arguable with some financial transactions as to whether it should be included in one or the other, but ultimately the overall financial flows have to balance. If there’s an imbalance, the value of the pound will change in direction necessary to correct that imbalance.

    Its not even possible to accurately tally all the financial flows. Indeed, many of them may even be illegal. Movements of cash in suitcases across borders or via Bitcoin on the net etc. These can be payments for drug imports and other kinds of criminal activity.

    Nevertheless, the Government will be aware of the approximate situation and will know that it has been selling gilts (ie government bonds) to overseas and other buyers. So what should it do with the proceeds of these? A country wishing to run a surplus in its trade needs to purchase bonds denominated in the currency of its customers. Essentially it is part of the process of the surplus country lending money back to its customers so they can continue to be good customers. The Government spending that back into its economy to put it back into the hands of the spenders is another part of that process.

    If government doesn’t know the exact amounts, for reasons just explained, all it can go on is the inflationary effect of the deficit spending and bond issuance. If inflation is getting to be too high then it needs to cut back its spending. and reduce sales of gilts to take the heat out of the economy.

    Should governments be worried if they are running a financial deficit in their current and capital accounts and are selling bonds ? I would argue that providing the imbalance isn’t too great, its about 4% in the UK, then there is nothing too worry about at all. It’s a compliment to the UK that buyers want to hold gilts denominated in £. If they weren’t happy the buyers would disappear , the £ would readjust at a lower value and the financial accounts would balance in another way.

    1. Gary
      December 28, 2014

      The neoliberals have got it so wrong. They flippantly dismiss the bop deficit with ” oh well, the currency will adjust and so it doesn’t matter”. No, it does matter!

      What should happen but doesn’t is that the currency should stay the same and manufacturing productivity and efficiency should be adjusted. Adjusting the currency and then doing nothing about sloth in manufacturing because you have retained pricing power, is a race to the bottom.

      The neoliberal legacy of “debts don’t matter” will one day be spoken in the same breath as Charles Ponzi. Meanwhile we will all be economically wrecked. Either these people are genuinely clueless or they are the worst types of crooks. imo

      1. petermartin2001
        December 29, 2014


        Neoliberals do tend to take the view that the external deficit “doesn’t matter” , or at least it “doesn’t matter” too much. On the other hand they argue that the internal deficits, ie govt budget deficits, do matter a lot. They are also oblivious to the build-up of debt in the private sector. Its about 170%. They don’t seem to think that matters. Or if they do they don’t mention it too often.

        They all matter but not quite in the way they are, or aren’t, considered to.

        Mr Cameron, and many others, are right to worry, but they are worrying about the wrong thing: panicking about a rising level of government debt, when at 91% of GDP, it’s 80 percentage points below the level of private debt. If Mr Cameron thinks reducing government spending when private credit is contracting is good economic policy, then he’s ignoring the biggest crash in economic history – the European Union, or Eurozone part of it, where government austerity turned the crisis into a second Great Depression.

  17. acorn
    December 27, 2014

    “So its a bit like borrowing from a bank. If you import a little then the exporters own you. If you import a lot then you own the exporters – because they then have nowhere else to go.” (3spoken).

    The BoP is not a problem as long as the states that export to us think we are politically and economically stable. If the net trade bit of the current account of the BoP, is unsustainable, the currency will float down to a new balance point. That would theoretically increase our export potential and reduce our import capability. As Mr Osborne’s “march of the makers” still haven’t got their boots on yet, there will be no doubling or more of exports this side of 2020.

    Export led nation like Germany; China; Japan etc, don’t want the currency value to drop in the countries they export to. So with the aid of their home currency issuing central bank, they will buy up spare currency of their export destinations, to pull those currencies up in value, to keep their export volume up.

    The result of being a large net importing country is that lots of other countries end up with train loads of your currency which won’t pay any wage bills back home in China etc, so the exchange of debts between importers and exporters has to keep circulating, else the domestic economy of big exporters will just become a low pay sweat shop for the rest of the world’s benefit.

    The UK has a large import bill which is currently being financed by the government budget deficit and private sector reduced savings. Mr Osborne is planning to take away the government bit.

    1. acorn
      December 27, 2014

      “… UK government can also borrow from abroad to sustain higher consumption …”. Borrowing domestically to sustain consumption is not sustainable! Borrowing from abroad to sustain consumption,(presumably in a foreign currency) is neo-liberal madness!!!

      Snippets from other stuff today:- (1) The beauty of a sovereign floating fiat currency economy is that you do not have to defend the exchange rate with foreign currency reserves; and, you do not have to borrow in foreign currencies. If you need to import stuff from a particular currency area, then you need to pay for it with exports, of similar value, to that same currency area.

      (2) Central banks should be restrained from meddling in currency exchange rates, let them float where they will. The Russian central bank jacking up interest rates to rescue the Rouble was pointless. It just ends up injecting more Roubles into the economy as interest, when there are already too many Roubles that nobody wants! Putin should start taxing, in Roubles, all those foreign currency accounts in Russian banks and all those gas and oil pipes. More taxes will drive the Rouble up.

      (3) If you want to know where you are on the world productivity league tables, then you need to track your REER (Real Effective Exchange Rate). An increase in the real effective exchange rate will decrease international competitiveness. It means the country has relatively more expensive exports, leading to a fall in net exports and, eventually, to a negative trade balance. The UK REER has risen from 98 to 111 on the 2010=100 index. This indicates a considerable drop in international competitiveness that is restraining exports.

      1. acorn
        December 27, 2014

        I don’t do multiple posts on sites like this normally, but today is a little bit special. There is a glimmer of hope in the western world today; there’s a few people on this site will understand what it means. .

        Let us pray that similar happens in the UK before the next election.

      2. petermartin2001
        December 27, 2014

        Yes I’d agree that the Putin Govt is making the same mistake the Callaghan Govt made in the 70’s when they eventually had to call in the IMF. Putin is, and Callaghan was, in charge of a fully floating currency but yet thinks in terms of US$ rather than roubles.

        His task should be to make the rouble a proper currency along the lines you suggest and he needs to do something to stabilise its internal value rather than external value. 10% inflation is getting to be too high even for Keynesian comfort. Indeed Keynesian stimuli don’t work effectively when inflation gets out of control.

        So we both agree with Dr Redwood for a change that the UK’s BOP, or its external deficit, isn’t a big problem! I’d just ask why can’t we all agree on the internal deficit too? After all, the two are inextricably linked.

  18. forthurst
    December 27, 2014

    According to the think tank, the Centre for Economics and Business Research (CEBR), our GDP is on course to overtake Germany’s by 2030; good news indeed. The extent to which we will be dependent on our drugs and prostitution industries is not clear; however, maybe when the Labour government assiduously turned a blind eye to growth activities centred in locations such as Rotherham, they were on to something. Nevertheless, with the pattern of economic activity commencing under Thatcher, in which in the now, post-industrial society, factories are turned into shopping malls, we are well positioned to consuming our way to becoming the largest and most successful economy in Europe; if the Germans want to spend their time manufacturing stuff that we want, that’s ok, in fact it’s essential. We will, of course, need to keep selling our assets towards balancing the books, but in the neo-liberal free-for-all that’s also ok; at some time in the future, with nothing left to sell, neither businesses nor infrastructure nor buildings nor land, and with the pound collapsing, we can then simply revert to becoming a sweatshop to supply the foreign nouveaux riches owners of our country.

    When the established parties avoid talking about a topic, it is a clear signal that it is extremely important to the future of this country; such is the case of the EU and mass immigration, until, that is, someone with a pediliction for booze and fags refused to shut his rather oversized mouth about it. So is the chronic balance of payments important? Of course it is; it is the main symptom of a pathologically unbalanced economy, one that is heading for the rocks. So how do we address this problem? Part of the solution can be gleaned from the CEBR bar chart published in the DT: it is very obvious that the prognostications for growth by 2030, as between the high growth USA and BRICS with ourselves as with the other EU countries, indicates that we are hamstrung by being a part of the EU and having adopted the green economic and strategic madness of the global warming scam, which as we all know or should know by now, originated from the UN, as with homosexual marriage, arriving here via the Brussels dictatorship, as a deliberate strategy for destroying our industrial base and subsidising its transfer to the Orient, particularly India.

    Anyone who imagines that increasing the population more and more, consuming more and more, selling more and more assets, is a prescription for success is either an idiot or deliberately imbarked on a policy of treason. Perhaps it’s time for an English patriot to run this country for a change.

  19. Brian Tomkinson
    December 27, 2014

    JR: “Is the UK’s balance of payments a problem?”
    Osborne would certainly like to ignore it (along with endless other things) at least until after May. Just how you can square supporting him and Cameron when you know the state of the economy and understand it far better than them is a mystery. Please don’t just cite the Labour alternative, we need more thought than that.

  20. Terry
    December 27, 2014

    I have never been a fan of the GDP index to monitor the performance of a Nation. It is too easily manipulated and even considers Government expenditure as a growth factor. On a Private company’s books, ‘expenditure’ features on the outgoings side of the balance sheet yet within GDP, it is treated as revenue.
    However, Balance of Payments is much different. It shows a clear picture how we are doing in the world. Anything manufactured, sold and bought within the UK is merely recycling our own money whereas exports generate foreign currency income for us and that is where our real growth lies.
    If there is a BoP deficit then the difference must be accounted for somewhere. And that ‘somewhere’ is usually in borrowings. Or selling the family jewels, in our case.
    I do not know where to obtain the combined historical BoP records of say, the G20 but I would not be surprised to find that those with the highest debt burdens are those with the worst BoP figures although their respective GDP returns were not that bad.

    So, GDP can only be used as a guide but the Balance of Payments should, once again, feature as a more reliable performance indicator and for all Nations.

    The UK cannot continue borrowing at cheap rates and there is a finite number of jewels to sell to the foreign investors. What happens after both are depleted will be pretty neither for our currency nor our economy but I expect that Downing Street are hanging back until next June before they take any serious remedial action. No guesses, why.

  21. fedupsouthener
    December 27, 2014

    I fear for the future of my children.

  22. bluedog
    December 27, 2014

    For centuries the balance of payments was unquantifiable but the British economy continued to grow. As Dr JR says, when the current account is in deficit, capital flows provide a balancing item. This is always possible when the currency is floating and not pegged to a gold valuation or an artificial store of value like the USD which was itself pegged to gold before the abolition of the Bretton Woods agreement. Inward capital flows become constrained when a managed float seems likely to lead to a devaluation against the agreed store of value. Indeed, the possibility of devaluation accelerates capital flight which reduces liquidity in the domestic economy so that a crisis on the external front is internalised on the domestic front. Eurozone economies are living proof of this effect. Those who worry about a current account deficit should not do so, the currency will provide the adjustment that keeps the economy competitive, particularly when real interest rates are negative.

    December 28, 2014

    I’m uncertain how in all instances building “expensive flats in London” to “sell to foreigners” is a net gain for the UK.

    When banks and other British lenders felt it unwise to lend money, Australian companies for example were having a credit boom and could be persuaded to lend into money-starved countries like the UK and other parts of Europe to profit of course. Such monies were not necessarily arranged with wholly owned British companies but were at least partly owned by say huge American financial institutions who took the low-interest money to invest in the building of flats…to make profit of course not for the UK but for themselves.

    The work on such buildings, it is said time and time again, was undertaken by companies, perhaps again not British ones, who undoubtedly employed migrant labour who took their earnings abroad or at least sent a goodly proportion of them abroad.

    The whole chain from loan-to-buying has not necessarily benefited the UK at all. And to whom will the owners of the “expensive flats” ( could they be otherwise in London? ) sell to ultimately and when? Surely they will choose the most profitable time to sell . They may even choose to sell if the market suddenly declines and the lower priced INexpensive flats may be bought by foreign landlords and perhaps even rented out to British citizens and the profits from their payments going abroad. Surely this is how it happens unless we think persons such as Russian Oligarchs do not know one iota about business.

    In short, for expensive flats: where did the money originate for the building work? Who borrowed the money? Who built the flats? Who did the selling of the flats? Who owns the flats now and what profit to the UK except there are properties in this island owned by people other than its inhabitants? Is this another example of GROWTH in the economy and can it be equated with the invasive nature of the GROWTH of Japanese Knotweed?

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