Balance of payments deficit

The balance of payments consists of the capital account, the current account and any errors/omissions.

While overall, the balance of payments will always balance due to its nature, parts of it can be in deficit. In the UK, for example, we have a current account deficit due to our large deficit of trade in goods; despite our considerable surplus in trade in services (mainly financial). This deficit is accounted for by a surplus on the capital account. The UK is a successful, developed economy which means that it attracts a large amount of foreign investment and flows of hot money. These lead to the surplus on the capital account which balance the UKs balance of payments.

The extent to which imbalances in the balance of payments matter depends on what causes the imbalance. The UK, despite having a current account deficit, would be seen as a relatively healthy economy in terms of the balance of payments. Lots of developed economies have similar deficits on their current account, especially if they are not export led economies. An imbalance is a worry if it stems from the over-importation of consumer goods such as toys etc. This can be more harmful than if a country is importing capital goods to increase employment or productivity. These types of current account deficit are known as benign and malign deficits. Malign deficits are difficult to justify - as they no doubt have to be offset by borrowing, which is clearly undesirable.