Fund managers are readying themselves for a switch to fiscal policy ahead of Chancellor Philip Hammond’s first Autumn Statement on Wednesday.
Trevor Greetham, head of multi asset at Royal London Asset Management, says now is not the time for the Government to announce half-hearted austerity measures, arguing it is possible for governments to “borrow their way out of debt”.
He says: “Now is the time to reset fiscal policy and the focus should be on boosting nominal growth to offset Brexit uncertainty rather than trying to deliver ‘austerity-lite’.”
Greetham says UK growth should actually reduce debt over the long term if the Government borrows money in the gilt market at a rate of 1-2 per cent each year and invests in transport infrastructure, housing and power generation.
“The Government should counteract the lack of private sector investment since the financial crisis,” Greetham says. “Contrary to popular opinion, governments can borrow their way out of debt if interest rates are low enough – or ‘save’ their way deeper into debt if austerity causes the economy to weaken.”
Quentin Fitzsimmons, portfolio manager at T. Rowe Price, points out that Hammond has suggested “the cost of money is cheap”, and with bond yields close to all-time lows, “the timing would seem to be right for the Government to embark on a major spending programme”.
However, Fitzsimmons says the Government’s fiscal credibility will be paramount in the face of Brexit, with foreign investors making up a quarter of the gilt market, so instead of borrowing billions of pounds more, the Government is may look to other sources, such as infrastructure bonds.
While Fitzsimmons is not overly concerned about the impact of fiscal policy on inflation, saying it could be managed “without having much of an inflationary impact”, he warns that the major building projects could be hindered by the relatively low levels of unemployment and planned immigration controls, while public borrowing could create steeper yield curves, reducing the value of longer-dated bonds.
“The impact of this would be unlikely to be confined to the UK,” Fitzsimmons says. “Major bond markets have typically been highly correlated, flattening and steepening at the same time, so it is reasonable to assume that a steepening in the UK yield curve could lead to the same happening in other markets – especially if other countries follow the UK and introduce fiscal stimulus packages of their own. Any measures announced by the UK Government will therefore be closely monitored by the markets to determine their effectiveness.”