November 3, 2015 / 12:11 AM / 2 years ago

UK current account deficit may reflect corporate tax avoidance - ECB's Lane

A pile of one pound coins is seen in central London, in this June 17, 2008 file photograph.Toby Melville/files

LONDON (Reuters) - Britain's large current account deficit may be less serious than it appears due to distortions created by companies avoiding tax, incoming European Central Bank policymaker Philip Lane said in a research article published on Tuesday.

Lane, an economics professor who will succeed Patrick Honohan as Ireland's central bank governor later this month, said the headline level of Britain's current account deficit was an inadequate guide to the country's true financial position.

"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," he wrote in an article for Britain's National Institute of Economic and Social Research.

Britain's current account deficit reached a record high 5.1 percent of gross domestic product last year, though it has narrowed since.

The Bank of England has said the deterioration since 2010 was partly due to foreign investments in Britain generating higher returns than British investments in the euro zone - a reversal of the position before the financial crisis.

Lane said another reason could be British-based firms moving their nominal headquarters to countries such as Ireland or Switzerland for tax reasons, while the underlying economic activity remained in Britain.

"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," he said.

"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," he added.

Lane did not discuss the broader outlook for the British, Irish or euro zone economies.

(This story has been refiled to remove garble from headline and change media identifying slug)

Reporting by David Milliken; Editing by Tom Heneghan

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