UK Balance of Payments

The balance of payments is the record of a country’s transactions / trade with the rest of the world. The balance of payments consists of:

1. Current Account (trade in goods, services + investment incomes + transfers)
2. Capital Account / Financial Account (capital and financial flows, net investment, portfolio investment)
3. Errors and omissions. It is hard to collect all data so some is missed out.

UK Current Account

The UK has had a persistent current account deficit in the past 25 years. This is caused largely by the deficit in trade in goods, and recently a deterioration in investment incomes.

• The underlying UK current account deficit, excluding precious metals, widened to £23.8 billion or 3.2% of gross domestic product (GDP), in Quarter 2  2025
• In 2024, the current account deficit for whole year was £63.2 billion, or 2.2% of gross domestic product (GDP) in 2024
• In 2024, the financial account recorded a net inflow of £64.1 billion (2.2% of GDP) in 2024.
• The UK has had a persistent current account deficit in recent years.

Source: ONS Balance of Payments  |  Current account as % of GDP

What does it mean to have current account deficit/Financial account surplus?

A simplistic explanation.

• The UK buys electronic goods from China (imports). So UK has deficit on current account.
• China uses this foreign exchange currency to purchase UK assets (e.g. Government gilts or buy factories). This is a financial surplus as money comes back to UK. (though China has more ownership of UK assets)

Components of Current account

1. Trade in goods
2. Trade in services
3. Primary income (e.g. UK earnings from direct investment, shares, debt, bonds)
4. Secondary income (e.g. General government transfers, e.g. payments to UN)

Components of UK current account 2025

This shows that the UK had

• A deficit in overall trade
  • Surplus in trade in services (e.g. insurance, financial services
  • Net goods trade deficit (UK importing more goods than it is exporting)
• Primary income deficit.
  • Wages. For example, if UK companies pay UK workers abroad, this leads to money leaving the UK and is a debit on the current account. Currently, outflows to UK workers abroad are greater than inflows to foreign workers in UK.
  • Investment incomes. This is income received on direct investment. A deficit implies that the return on investment in the UK by foreign companies is greater than investment abroad. This reflects a better rate of return on UK investment, with profit from inward investment being sent back to country of origin.
• Secondary income Deficit. Transfers, e.g. funds to EU, UN.

How does UK compare to other countries?

• Countries like China, Japan and Germany have a current account surplus
• UK and US have a current account deficit

UK current account deficit from mid 1980s

Since the mid 1980s, the UK has generally had a persistent current account deficit. Essentially, the UK has been importing more goods and services than it has been exporting.

source:  – balance of payments data selector ONS | balance of payments

Reasons for UK Current Account Deficit

1. Deindustrialisation. Since the process of de-industrialisation accelerated in the early 1980s, the UK has had a large deficit in goods. The UK still manufacturers goods, but we have become a net importer – especially of manufactured goods (e.g. clothes, computers, cars). The graph below shows the sectors with the biggest deficit.

UK manufacturing has declined, hence the decline in export of goods.

Total deficit in goods for 2024. -£210.7 billion or 7.3% of GDP

The biggest deficit was in finished manufactured goods, followed by food and semi manufactured goods. The UK now has a deficit in oil and other fuels.

Total surplus in services 2024 6.4% of GDP – (£185.5 billion)

• The big contributions come from financial services and business services (insurance, fund management, management consultancy)
• The only deficit was in the area of travel (UK travel abroad more than foreign visits to UK

This deficit in goods, is partly offset by a surplus in services (e.g. insurance, financial services and business services and finance) but, it is not sufficient to overcome the trade deficit.

2. Relatively High consumer spending. High consumer spending tends to causee an increase in imports causing a deterioration in the current account. For example, in the 1980s boom, we saw a fall in the savings rate and a rise in UK consumer spending; this caused a record current account deficit. The recession of 1991 caused an improvement in the current account as import spending fell.

3. Relatively Low Saving Rate

Related to high spending, is saving rate. The UK has had a relatively low saving rate 2007-2023 – compared to some of our competitors. A low saving ratio implies a relatively higher percentage of spending on consumer goods (which tend to be imported). However, in recent years, the savings ratio has increased and that has helped reduce spending on imports.

4. Competitiveness. If there is a decline in relative competitiveness, e.g. rising wage costs, industrial unrest, poor quality goods – then it is harder to export causing a deterioration in the current account. In recent years, the UK has experienced higher inflation than other countries. One reason for declining competitiveness in industry has been higher energy prices.

UK has the highest industrial price of electricity in the world, causing a decline in exports of goods, especially energy intensive industries like chemicals.

5. Growing deficit in investment incomes. The UK has a deficit in trade in goods. But, since 2011 the current account deficit has been increased due to a fall in direct investment income.

6. Financial account surplus. The UK has been able to attract sufficient credit items on the financial account financial flows, e.g. portfolio flows, investment flows to finance the UK’s current account deficit. Without these inflows, the Pound would depreciate in value.

Policies to reduce a current account deficit

To reduce a current account deficit, we need to pursue policies involving some or all of the following:

1. Reduce consumer spending – through tight fiscal and tight monetary policy. E.g. higher income tax will reduce disposable income and therefore reduce spending on imports (however, it will also lead to lower economic growth)
2. Supply side policies to improve competitiveness.
3. Devaluation of the exchange rate. This makes exports cheaper and imports more expensive. See: exchange rate and balance of payments

See also more on: Policies to reduce a current account deficit

UK Balance of Payments – Financial/capital account

This is the counter balance to the current account. The financial account includes:

• Direct investment
• Portfolio investment
• Financial derivatives (net)
• Other investment
• Reserve assets

Does a current account deficit matter?

Should we worry if the UK has a current account deficit?

Yes, we should worry

• It is a sign of uncompetitiveness, which will lead to lower economic growth and poorer prospects in the long run.
• If capital / financial flows dry up, it could lead to depreciation in the exchange rate and a fall in living standards
• It is a sign of an unbalanced economy.

No, we shouldn’t be concerned

• The UK has had a persistent deficit since the mid 1980s. Countries with large current account surplus have not necessarily done better, e.g. Japan had a long period of stagnation.
• In era of globalisation, financial flows are easier to attract and therefore the deficit is financed by these capital inflows.
• If the current account was too large, there should be a depreciation in the exchange rate to restore the balance. A current account deficit is a bigger concern in a fixed exchange rate (like Euro) because there is no option of depreciation.

Terms you may come across

• Trade deficit. The trade deficit is the biggest component of the current account. This means trade in goods in services; though some times people may mean to refer to the trade in goods.
• Widening of Trade Deficit. This means the deficit on trade in goods became larger. Also referred to as a deterioration or ‘worsening’.
• Balance of payments crisis. When a current account deficit can’t be financed by capital flows causing a rapid devaluation in the exchange rate.

Further Reading on the balance of Payments

• Balance of payments and the terms of trade
• Causes of current account deficit
• How to reduce current account deficit

Exchange rate

In theory, a depreciation in the Pound Sterling should make UK exports more competitive and improve the current account.

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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