Britain’s standard of living is increasingly reliant on foreigners, analysis by RBS’s chief economist has suggested.
Britain’s standard of living is increasingly reliant on foreigners, analysis by RBS’s chief economist has suggested.
Two deficits of two very different kinds hit the headlines over the last two weeks, the budget deficit and the current account deficit.
Taken together, the fact the budget deficit is shrinking slower than was planned while UK current account deficit is widening, the bank said the UK is “increasingly reliant on foreigners to fund our standard of living”.
A briefing note from RBS warned: “Maintaining the outside world’s confidence is crucial for the stability of the UK economy.”
The UK current account measures the difference between money and credit going in and out of the UK (through exports, imports and income paid on assets both home and abroad).
The reading for Q4 2015 was -7% of GDP – the deepest deficit since at least 1955 – and continuing a recent deteriorating trend.
The RBS note said: “The biggest problem is that we are not receiving the income on our investments abroad that we once were.
“A stronger euro area recovery would be a help in that regard. And while we do run a goods deficit it’s a very different story on services – our surplus has risen an impressive 75% since 2007.
“Our economic future will depend on our continued ability to capitalise on where we are globally competitive.”
Meanwhile the government borrowed £70.7bn in the 11 months to February, meaning that spending can only exceed tax receipts by £1.5bn or less in March if it is to hit its 2015/16 target set in the Budget three weeks ago.
Borrowing is still falling though, at this point last year it was £14bn higher.
The RBS note said: “In past years it has been disappointing tax revenues that have caused the deficit to shrink more slowly than planned.
“February’s data had some reasons to be optimistic on that front. Income tax receipts were up 4.5%, demonstrating solid rises in household incomes this year.
“People have been spending that extra income too, pushing VAT receipts up by 4.1%. The public finances need that growth to keep on rising.”
Added to this dynamic is the fact that UK households have been borrowing significantly.
They now owe almost £1.5 trillion, up 4% on a year ago.
The vast majority of that is debt mortgages, where lending growth has been climbing steadily since the start of 2015 to its current pace of 3.5%.
RBS added: “Much of that growth has been driven by the buy-to-let sector, so it was no surprise that the Bank of England announced a review on lending standards in the buy-to-let market.
“The likely outcome is a more standardised approach to assessing affordability, much as has been the case for owner occupiers for the last couple of years. Coming on top of the Treasury’s stamp duty surcharge and other tax changes, growth looks rather slower from here.”
