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16 October 2017

Is the UK really “missing billions” after the Brexit vote?

The Telegraph reported a dramatic gap in the nation's finances. 

By Julia Rampen

“Britain’s missing billions: Revised figures reveal UK is £490bn poorer than previously assumed,” the Telegraph reports. Global banks, it says, are “stunned” at the revelations. Lib Dem leader and Remainer-in-chief Vince Cable declared: “News of this massive write-down shows our economy is in real trouble.”

The Telegraph article refers to two figures: the flow of foreign direct investment, and the net international investment position, which has collapsed from a surplus of £469bn to a net deficit of £22bn. The idea of the “missing billions” appears to have been triggered by an update from the Office for National Statistics published on 29 September 2017. 

So has the UK fallen victim to the greatest heist of all time, as the headlines would have you believe? And is Brexit responsible? 

Net foreign direct investment is down

Of the £490bn revision, £160bn comes from net foreign direct investment. This is when a company (or sometimes a government) directly invests in another country, such as Nissan’s car manufacturing plant in Sunderland. The net FDI is the amount foreign investors are putting into the UK, balanced against the amount UK companies are investing elsewhere in the world. 

The ONS revision came about because a foreign investor bought a large UK business, and only recently confirmed the details of how much it was spending in the restructure. 

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In the bigger picture, FDI had recovered from the nadir of the summer of 2016, but it is still below the levels enjoyed since 2011, and the revised data shows it slumped in the second quarter of 2017. This seems to bear out the Remainer view that Brexit is making the UK less attractive to investors. 

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“Being located in the EU, I’m sure that was a bit of a draw,” says Mitul Patel, head of interest rates at Janus Henderson Investors, of companies like Nissan investing in the UK. “They could sell goods manufactured in the UK across Europe.”

Net international investment is back on trend

The “missing billions”, however, can be mainly attributed to the ONS revision of the net international investment position as a whole.  

This is the value of foreign assets owned by UK residents, balanced out against UK assets owned by foreign residents. For example, a Spanish villa owned and rented out by a UK family would fall into the first category, while a London flat owned by a Spanish landlord would fall into the second. 

The ONS had predicted a surplus in 2016, but in September this was revised to a deficit. This might sound gloomy, but in fact, for the last few years, the UK has generally run a net deficit (the exception was 2008).

The fact statisticians had expected a surplus tells us more about the exchange rate than anything else. Because the pound devalued after Brexit, they expected that foreign assets owned by UK residents would be worth more in sterling, while UK assets owned by foreign residents would be worth less. 

Imagine those property investors again. If the British family with the Spanish villa sold their property, they would get more for their money when they changed the euros into pounds than they would before Brexit, even if everything else stayed the same. But if the Spanish landlord sold their London flat, they would get less when they converted it back into euros. 

The value of the pound has slumped since Brexit. So why did the ONS get it wrong? One reason is that more international investors hold UK shares than was previously realised. The ONS revised net portfolio investment down by £499bn (this was offset a little by the fact loans to foreigners were higher than realised). In other words, it was an accounting error. 

The billion dollar problem

So has Brexit really robbed us of billions? Well, yes – starting with the £1.5bn annual budget for the Department for Exiting the EU. 

But there are other problems facing the economy as we lurch into Brexit negotiations. As Patel points out, the missing billions might have been an accounting error, but it doesn’t help when the UK is entering a period of economic uncertainty.

“The UK always had a current account deficit, so the problem isn’t a new one,” he says. “What gives it added concern is we are in the Brexit process.”

Economic data also increasingly shows that a pet theory of the Brexiteers has not come true, namely that the slump in the pound has not made British exports more attractive abroad. “A lot of the stuff we export has a high import quantity as well,” says Patel. “If you import all the parts of  a car before you assemble them, it isn’t really going to help.”