Can the deficit be financed over the long term?
Opponents would say that the UK’s uncompetitiveness doesn’t matter as long as the deficit can be financed in the UK. This may be easy enough at the moment, but may not be true if the deficits become extremely large. Also, the inflows of capital that finance these deficits are notoriously fickle. The tap can be turned off just as easily as it has recently been turned up. In smaller countries with less sophisticated capital markets, sustained deficits are a real problem. Countries that ‘lend’ them money (through the capital account surplus) will expect to get their money back with interest at some point. If this money does not appear to be forthcoming over the medium term, the lending country may demand to have their money back, and other countries will be less likely to lend further sums of money. This certainly happened in Africa when Western banks stopped lending money because they couldn’t see when they would get paid back. In fact, some of them never did! Of course, some African cou
