The UK’s deficit: are we in big trouble?

published 17 February 2006

Where the US goes, the UK follows, says Lex in the FT. This is nowhere more true than when it comes to the trade data.

In 2005, America's goods and services deficit hit a record 5.8% of GDP, and the UK was not far behind with a gap of 4% of GDP "the worst since 1989". The goods deficit (which does not include services) was equivalent to 5.4% of GDP - the highest proportion since 1974 when it stood at 6.3%.

The reasons for this are well known: we are importing more and more cheap goods from China and we've just become a net importer of oil for the first time since 1979. No one in the UK seems bothered about this it has "barely prompted a whimper" but it really does matter.

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Indeed it does, says Hamish McRae in The Independent. At the moment, we are seeing a huge level of foreign investment in that foreign firms are keen to buy our companies, which is helping us to offset the trade deficit, but this is hardly sustainable. We are effectively "selling solid assets to finance our taste for luxury imports". It's like selling the family farm to pay for the son's gambling losses. "Sooner or later there are no farms left to sell."

As we become increasingly dependent on imported fuel, the deficit is only going to get worse, economist Janet Henry told The Times. But things aren't nearly as bad as they were in the 1970s, when trade deficits threatened the collapse of the whole economy, and let's not forget that we ran a trade deficit throughout the 19th century, "when the UK was the workshop of the world".

Perhaps, says McRae, but ultimately, no country "can prudently live beyond its means" for ever. At present levels of the current account deficit, we are "probably just about OK". But as we import more and more oil, we will have no choice but to cut our dependence on imports of frivolities.

Annunziata was a deputy editor at MoneyWeek, covering financial markets, politics, economics and comment pieces. She then went on to the Daily Telegraph as a lead writer where she wrote a column on young women’s financial issues. She was briefly a member of the European Parliament for the East Midlands region in the UK as part of the Conservative Party. Annunziata continues to write as a freelance journalist.