“The current debate being played out in the letter pages of leading newspapers is more about politics than economics, with the entrenched views of the fiscal doves and hawks aimed at supporting their favourite political party, but in reality sowing confusion amongst the electorate and increasing the prospects of a hung parliament.
“There is little debate over the need for fiscal tightening over the next few years given the record peacetime borrowing requirement. The fiscal doves believe that the government should wait until strong growth is restored before aggressively tightening policy, while the hawks believe that delay is dangerous and the resulting crowding out of private sector demand from the budget deficit and loss of international investor confidence will drive the economy back into recession.
“We do not believe that this is a choice issue. The UK economy is damned if it proceeds with aggressive fiscal tightening and damned if it delays. Tightening is unlikely to be compensated for by reductions in consumer and corporate savings rates. In particular, we do not believe that either unemployment or corporate liquidations have peaked in this cycle. However, the forward rate is driven by the crowding out of private sector investment and the record budget deficit. Coupled with the risk of sovereign credit rating downgrade and international investors’ reducing exposure to gilts, the exceptionally high forward rate could become even higher and more deflationary for the economy.
“Caught between a rock and a hard place, it is better to be in control of your economic destiny. We believe that the incoming government should speed up fiscal consolidation (aided by the voluntary help of the IMF) despite the likely impact on the economy as the effect is likely to be milder than a forced fiscal consolidation at the behest of international investors and rating agencies.”
For Stuart’s full commentary please see his blog at www.ratesviews.com.
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.