Factors that are likely to cause an increase in the size of the deficit on the current account of UK balance of payments.

Current account deficit is when the balance on the current account is a negative figure. This means that the amount of money flowed in the UK (exports) on account of visible trade like machinery, invisible trade of services like banking and insurance, dividends, profits, incomes, rent, interests and international transfers like charities and donations is less than the amount of money flowed out (imports) of the UK on account of all these transactions.

A current account deficit may result because of less competitiveness of firms in terms of price and quality in the UK economy, increased demand of imported goods, a strong currency or because the flows of income inside UK economy are less than the money flowed out of the British economy.

Less competitiveness of British commodities in terms of price and quality means that their quality is low and prices are too high, in the domestic market and abroad. Inefficient use of factors of production, for example, lack of use of technology or of unskilled labour in production process will result in uncompetitive commodities. This will cause inflation and high average costs which will make UK goods and services expensive and will decrease their demand in the local and international market, causing exports to decline and imports to increase as consumers demand for cheap imported goods increase.
A rise in the local income levels of the population will cause their demand for imports to rise as they will have more purchasing power and disposable income to spend on expensive commodities.
Moreover, a strong currency, i.e. the pound, in terms of other currencies will add to the reasons of the current account deficit. This is because due to a strong currency exports will tend to be expensive and imports to be cheap, causing demand of imports to increase and of exports to decrease, hence widening the current account deficit.
If the outflows of income, rent, dividend, interests, donations and internationals transfers is greater than the inflows, this will cause a current account deficit and so will the negative balances of trade of goods and services.

However, the effect on current account will depend on how intense the changes in demand caused by these factors are. If UK has a monopoly in the production of a certain kind of commodity, its demand in the local and international market will not fall even if that commodity loses its competitiveness. Thus the effect of loss of competitiveness of the commodity will depend on the number of rival products it have.
If the costs and prices of commodities abroad are more expensive than the UK products, their demand will not fall even if their prices rise. But this will be true if the price rise stays below the prices of rival products.
Rising incomes level will cause increase in the demand for imports if those products are luxury goods and are income elastic. If the UK goods and services have inelastic income elasticity, they will not lose their demand.
Further more, if the UK goods and services are price inelastic, they will not lose their international demand, even if the currency is strong in terms of other currencies.
Besides this, the flows of IPD’s in the UK will depend on the rent, interest and dividend rates. If they are lower than other countries, they will not attract the flows of IPD’s in the country.

These are the factors that can lead to a current account deficit.