Britain is not reliant on the ‘kindness of strangers’ to fund its current account gap, said researchers at the Bank of England, contradicting Mark Carney’s explanation of how the UK funds its lifestyle. Instead, the current account deficit has been possible because of British nationals making capital gains on foreign assets, which have funded the country’s overseas spending. The UK’s current account deficit reached 5.9 per cent of national income at the end of 2016, the highest level since equivalent figures started to be collected in 1948. The two main elements of the current account balance are the trade balance — the difference between the value of Britain’s exports and imports — and the primary income balance — which includes the difference between investment income earned abroad by residents, and that earned domestically by non-residents. Mr Carney, the governor of the bank, has repeatedly warned that Britain’s trade deficit leaves the country reliant on foreigners investing in the UK to fund the current account gap. Mr Carney said that “relying on the kindness of strangers is not optimal . . . when you’re running a 4-4.5 per cent current account deficit” and when uncertainty over Brexit might deter foreign investment. But a new analysis of official statistics by two members of bank staff, published on Thursday, challenges this view. “Rather than a pauper relying on the charity of strangers, the UK is more like a member of the landed gentry, using its past foreign investment to fund its lifestyle of excess,” said Rachana Shanbhogue and Stephen Burgess, the authors of the research. The new research was published on the Bank Underground blog, an outlet for bank staff to share their emerging thinking and views that challenge or support “prevailing policy orthodoxies”. Between 2012 and 2016, there was a net outflow of £82bn of foreign investment from UK assets, the researchers said. Instead, the widening current account deficit has been funded by UK residents cashing in on capital gains made on their investments abroad. This has been used to fund the country’s increased overseas spending. Between 2012 and 2016, UK investors cashed in £526bn of foreign investments or an average of around 6 per cent of national income each year. However, these divestments were more than offset by capital gains made by UK residents on their overseas assets during that period. The value of overseas assets, which are typically denominated in foreign currencies, has been boosted by the devaluation of sterling since the Brexit vote. Recommended UK banks ready to withstand hard Brexit, stress tests find BoE secretly warned UK courts of Brexit onslaught Central banking has never looked more daunting Since UK investors currently hold assets overseas worth 420 per cent of UK national income, the country could continue to fund its current account deficit by disposing of foreign assets “for decades”, said the researchers. “This does not mean UK policymakers can be complacent,” said the authors. “An extreme reversal of attitudes to the UK — so that foreigners not only stop investing in the UK, but sell off their existing holdings — would clearly have large effects on UK asset prices. But . . . the UK is less vulnerable to the whims of foreign investors than they have been in the past.” Analysis in last month’s Financial Stability Report, published by the BoE, suggests that since the start of 2016, the UK has been more reliant once again on foreign investment to fund its current account deficit. Foreign capital inflows have increased and UK investors have acquired new assets abroad.
