Investment Clock insights

The end of austerity?


Trevor Greetham

6 Spetmeber 2019

The Chancellor’s £13.4bn increase in spending next year is another significant shift away from austerity, though the government will have reversed only about a third of the real terms cuts since 2010 and large reductions in working-age welfare are set to continue.
Austerity and Brexit are in something of a vicious circle. Austerity contributed to the discontent behind the Brexit vote*. In turn, all forms of Brexit are expected to damage the economy on a longer term view, according to government impact assessments, and this reduces the long-term wherewithal to fund public spending.
In the near term all UK political parties agree on the need to reverse cuts to varying degrees. We’ve seen something similar in the US, where a fiscally conservative Republican Party has fallen in behind a President who has blown the budget deficit out with late cycle tax cuts and spending pledges. Even Germany is considering fiscal stimulus.
None of this is surprising when you consider the markets are willing to pay governments to borrow. A weakening world economy means ten year government bond yields are negative in Germany, France and Japan and below the rate of inflation in all G7 countries.
For now investors are more interested in what happens next in the Brexit crisis than they are in UK spending plans. The other big issue on people’s mind is the world economy. We’re expecting fiscal and monetary stimulus to deliver a recovery in 2020, but things could get worse before they get better.
* Researchers at Warwick University highlight the link between parts of the country that suffered the greatest benefits cuts and those registering the highest Leave votes. Fetzer, Thiemo (2018) “Did austerity cause Brexit?” Working Paper. Coventry: University of Warwick. Department of Economics. http://wrap.warwick.ac.uk/106313/ 

The Chancellor’s £13.4bn increase in spending next year is another significant shift away from austerity, though the government will have reversed only about a third of the real terms cuts since 2010 and large reductions in working-age welfare are set to continue.

Austerity and Brexit are in something of a vicious circle. Austerity contributed to the discontent behind the Brexit vote*. In turn, all forms of Brexit are expected to damage the economy on a longer term view, according to government impact assessments, and this reduces the long-term wherewithal to fund public spending.

In the near term all UK political parties agree on the need to reverse cuts to varying degrees. We’ve seen something similar in the US, where a fiscally conservative Republican Party has fallen in behind a President who has blown the budget deficit out with late cycle tax cuts and spending pledges. Even Germany is considering fiscal stimulus.

None of this is surprising when you consider the markets are willing to pay governments to borrow. A weakening world economy means ten year government bond yields are negative in Germany, France and Japan and below the rate of inflation in all G7 countries.

For now investors are more interested in what happens next in the Brexit crisis than they are in UK spending plans. The other big issue on people’s mind is the world economy. We’re expecting fiscal and monetary stimulus to deliver a recovery in 2020, but things could get worse before they get better.

 

* Researchers at Warwick University highlight the link between parts of the country that suffered the greatest benefits cuts and those registering the highest Leave votes. Fetzer, Thiemo (2018) “Did austerity cause Brexit?” Working Paper. Coventry: University of Warwick. Department of Economics. http://wrap.warwick.ac.uk/106313/  

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