According to Philip Lane, a professor of economics who is soon to become Ireland’s central bank governor, the UK’s current account deficit is potentially being caused by companies’ tax avoidance activities.
In an article issued this week, Mr Lane highlighted that more companies based in the UK were registering their headquarters overseas in places like Switzerland or Ireland, for tax purposes, and that the deficit could not be used as a reliable indicator of Britain’s finances.
He said: “Substantial investments… in the gathering and analysis of more granular financial data are required if cross-border financial transactions and linkages are to be understood with any degree of accuracy.”
The Bank of England, meanwhile, has stated that the overall fall in current account funds since 2010 can be attributed to a number of factors, including overseas investment in Britain performing better than British investments in Europe.
Last year, a record current account deficit of 5.1 per cent of GDP was recorded, though the figure has since improved.
Mr Lane did not provide any further analysis or forecast for the British, Irish or Eurozone economies, but he added that: “To the extent that such financial engineering activities have no impact on the true net international investment position, any concerns about the sustainability of the external position are attenuated.
“More broadly, the recent UK experience provides just one more illustration of the challenges posed by the financial operations of multinational corporations in the interpretation of balance of payments data.”
