The four parts of the current account (trade in goods, trade in services, primary income, secondary income), the UK’s goods deficit and services surplus, the balance as a share of GDP, why deficits happen and whether they matter, and the switching, reducing and supply-side policies that address them.
In the second quarter of 2026 the UK’s current account deficit was 2.5% of GDP. It has been in deficit in every year since 1984, and in most quarters the gap has been between 2% and 5% of GDP. The chart shows it since 1990.
Behind the total are two very different stories: the UK sells far fewer goods abroad than it buys, and far more services. Then there are flows that are not trade at all: the income earned on investments and the money sent abroad as aid, remittances and EU and other contributions.
What exactly is in the current account, and does a deficit matter?
Source: Office for National Statistics, balance of payments, 29 September 2026 (series AA6H, current account balance as a per cent of GDP).
The balance of payments records all transactions between a country’s residents and the rest of the world over a period. It has three accounts: the current account, the capital account and the financial account. Taken together they balance: a current account deficit is matched by net inflows on the financial account, such as foreigners buying UK assets or lending to UK residents.
The current account has four parts:
A deficit means more money flows out than in; a surplus the reverse. The balance is usually quoted as a percentage of GDP, so that years and countries can be compared.
A country exports £300bn of goods and services and imports £340bn.
Its firms also earn £20bn more on investments abroad than foreign firms earn in the country.
Is its current account in deficit or surplus, and by how much?
Trade: 300 − 340 = −£40bn. Add the £20bn of net investment income and the current account balance is −£20bn. The current account is more than trade: income flows count too.
Build the current account one part at a time, for an economy with round numbers. Trade in goods first. This economy imports £60bn more goods than it exports: a deficit of £60bn, drawn to the left of zero. The UK’s goods deficit has been the largest part of its account for decades: it imports cars, electronics, clothing, food and fuel.
Check: Which of these counts as an export of services for the UK?
Tourists spending in the UK buy UK services: a credit on trade in services. The others are goods, primary income and secondary income.
Trade in services next: a surplus of £40bn, to the right. The UK is the world’s second-largest exporter of services after the United States: banking and insurance in London, law, accountancy, consultancy, architecture, universities teaching overseas students, and tourism. Goods and services together are the balance of trade: here −£20bn.
Check: Trade in goods is −£60bn and trade in services is +£40bn. The balance of trade in goods and services is:
The trade balance adds the two: −60 + 40 = −£20bn. A surplus on services offsets part of the goods deficit.
Then the income flows. Primary income is what residents earn abroad minus what foreigners earn here: wages, interest, profits and dividends. This economy pays out a little more than it earns, −£5bn. Secondary income is transfers: aid, remittances, payments to international organisations. Almost always a debit for a rich country: −£15bn here.
Teacher tip: Students mix up primary income with trade. The test: was anything bought or sold? Dividends on a share are income from owning it, not a sale of a service.
Check: A UK pension fund receives £3bn in dividends from shares in American companies. In the UK current account this is:
Income earned by UK residents on assets abroad flows in: primary income, credit side.
Add the four with their signs: −60 + 40 − 5 − 15 = −£40bn, a current account deficit. With GDP of £1,600bn that is 2.5% of GDP, which is about where the UK has been. The percentage is what matters for comparison: £40bn is a crisis for a small economy and a footnote for a large one.
Check: The four parts are −60, +40, −5 and −15 (£bn). The current account balance is:
−60 + 40 − 5 − 15 = −£40bn. Keep the signs: surpluses add, deficits subtract.
Why does a deficit happen? Competitiveness: higher costs or lower quality than rivals, often from weak productivity. A strong currency makes exports dear and imports cheap. High domestic demand: a growing economy sucks in imports, and the UK has a high marginal propensity to import. Structural change: manufacturing has shrunk to about a tenth of UK output, and much of what is bought has to come from abroad.
Check: Which of these would be most likely to reduce a country’s current account deficit?
Cheaper exports and dearer imports switch spending towards home-produced goods, provided demand is price elastic enough.
Does it matter? A deficit is a leakage from the circular flow: spending on imports is income for foreign firms, so net exports drag on AD and jobs. It has to be financed: by selling assets to foreigners or borrowing from them, which means future income flows out as dividends and interest, worsening primary income later. And if foreigners stop wanting to lend, the currency falls sharply.
Check: A current account deficit must be matched by:
The accounts sum to zero. Money flowing out through the current account comes back as foreigners buying the country’s shares, property and bonds or lending to it.
Three kinds of policy. Expenditure switching moves spending from imports to home goods: a lower exchange rate, or tariffs and quotas. Expenditure reducing cuts total spending so imports fall: higher taxes or interest rates, at the cost of growth. Supply-side policies raise competitiveness over time: investment, skills, infrastructure, which is the only route that does not trade one objective for another.
Check: Raising income tax to cut consumer spending in order to reduce imports is an example of:
It cuts total spending, and imports with it. The cost is lower output and jobs at home.
The student added the four figures as if they were all deficits: 60 + 40 + 5 + 15 = 120. Trade in services is a surplus, so it offsets the deficits: −60 + 40 − 5 − 15 = −£40bn.
Explain two reasons why the UK runs a persistent deficit on the current account of its balance of payments, and evaluate whether this matters.
The current account records trade in goods and services with the rest of the world, together with primary income (earnings on work and investments across borders) and secondary income (transfers). The UK has run a deficit every year since 1984, around 2.5% of GDP in 2026, because its large deficit on goods is only partly offset by its surplus on services.
One reason is competitiveness. UK productivity has grown at about 0.5% a year since 2008, slower than in the United States and much of Europe, so the cost of producing a unit of output has risen relative to rivals. Dearer, or no better, goods lose market share abroad, and UK buyers choose cheaper imports, so the goods deficit persists.
A second reason is demand. The UK has a high marginal propensity to import: when incomes rise, a large share of the extra spending goes on imported cars, electronics, clothes and food, partly because manufacturing has shrunk to about a tenth of output, so many of these goods are no longer made at home. Growth therefore widens the deficit faster than exports can close it.
Does it matter? A deficit is a leakage from the circular flow: spending on imports is income for foreign firms, so net exports hold back aggregate demand and employment. It also has to be financed. The matching inflows on the financial account mean foreigners buying UK shares, property and bonds, or lending to UK residents, and the dividends and interest paid on those assets flow out in future years, worsening primary income.
**However,** a deficit of 2 to 3% of GDP has proved sustainable for forty years because foreign investors have been willing to hold UK assets, and it has coexisted with full employment. The policies that would close it quickly have costs: a depreciation raises import prices and inflation, tariffs invite retaliation and higher taxes or interest rates cut growth. The deficit matters most if the financing stops suddenly, which is why the trend in the deficit and in the willingness of foreigners to fund it matter more than any one year’s figure.
Current account balance as a share of GDP: Office for National Statistics, balance of payments (series AA6H), released 29 September 2026. The component figures in the diagram are for an invented economy, chosen so the arithmetic is clear. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed.