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UK FISCAL: How concerned should we be about fiscal impacts on near-term monpol?

UK FISCAL
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  • There has been some focus this morning on a Treasury policy paper published back in December which stated that increasing borrowing by 1% of GDP (GBP25bln) could increase interest by rates between 50bp and 125bp.
  • The new Labour government is due to deliver its first Budget on 30 October and there has been much discussion on how fiscal rules will change and how much extra spending there will be.
  • The government has so far only committed to balancing the current budget and sticking to its manifesto commitments (no increases in income tax, VAT, employee national insurance and to maintain the pension triple lock).
  • However, the Treasury paper is assuming that all extra spending has no supply side impact.
  • Chancellor Reeves has spoken about balancing day-to-day spending and only borrowing for extra investment. If this is the case, the current deficit was forecast by the OBR to be 1.7% of GDP this year (and is running above that level currently), and based on the government’s “tough decisions” rhetoric, near-term borrowing may not rise as much as some expect.
  • Instead, it may be that if multi-year infrastructure projects are announced that borrowing forecasts go up in the future, but also impact the supply side at some point, too, so the near-term concerns surrounding the inflationary impacts from fiscal policy (and hence requiring higher Bank Rate) may be overblown by the market, in our view.
  • A higher term premia may well be required for gilt yields over the coming years, but again that doesn't necessarily need to have any impact on near-term MPC decision-making.
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  • There has been some focus this morning on a Treasury policy paper published back in December which stated that increasing borrowing by 1% of GDP (GBP25bln) could increase interest by rates between 50bp and 125bp.
  • The new Labour government is due to deliver its first Budget on 30 October and there has been much discussion on how fiscal rules will change and how much extra spending there will be.
  • The government has so far only committed to balancing the current budget and sticking to its manifesto commitments (no increases in income tax, VAT, employee national insurance and to maintain the pension triple lock).
  • However, the Treasury paper is assuming that all extra spending has no supply side impact.
  • Chancellor Reeves has spoken about balancing day-to-day spending and only borrowing for extra investment. If this is the case, the current deficit was forecast by the OBR to be 1.7% of GDP this year (and is running above that level currently), and based on the government’s “tough decisions” rhetoric, near-term borrowing may not rise as much as some expect.
  • Instead, it may be that if multi-year infrastructure projects are announced that borrowing forecasts go up in the future, but also impact the supply side at some point, too, so the near-term concerns surrounding the inflationary impacts from fiscal policy (and hence requiring higher Bank Rate) may be overblown by the market, in our view.
  • A higher term premia may well be required for gilt yields over the coming years, but again that doesn't necessarily need to have any impact on near-term MPC decision-making.