Boris’s spending splurge


Craig Inches, Head of Rates and Cash

5 August 2019

Since Jeremy Corbyn took the helm of the Labour Party, it has been commonly understood that a Labour-led government would involve a surge in government spending. Less envisioned was the idea that the Conservative Party might move the same way.
The past couple of weeks have shown that heavy government spending is just as much Conservative Party policy, and as such the outlook for the UK, general election or not, is likely to feature aggressive fiscal expansion.
Prime Minister Boris Johnson has announced that there will be an emergency budget in the autumn, designed to boost the economy in the face of the ‘no deal’ Brexit threat. Chancellor Sajid Javid has unveiled an immediate £1.1bn cash injection, with scope for £1bn more if necessary.
Johnson has promised to recruit around 20,000 more police officers and to spend an additional £4.6bn on education by 2022/23. Theresa May, for her part, pledged a £2bn pay rise for public sector workers as one of her final acts as Prime Minister.
In the euro area, the situation is rather different. Last week European Central Bank (ECB) President Mario Draghi repeated his call for governments to step up their spending, with the outlook for the eurozone getting “worse and worse”. Yet Draghi has no power over fiscal policy and, as ever, nobody seems to be listening.
In light of this lack of fiscal support, the ECB has signalled that it might cut interest rates and resume quantitative easing. That would reinvigorate the hunt for yield in the eurozone, forcing investors further up the yield curves.
Consequently, while the UK has been heading towards a steeper gilt curve, the ECB is on course for curve flattening; something we are capitalising on in our funds with an underweight position in long gilts versus an overweight in eurozone equivalents.

Since Jeremy Corbyn took the helm of the Labour Party, it has been commonly understood that a Labour-led government would involve a surge in government spending. Less envisioned was the idea that the Conservative Party might move the same way.

The past couple of weeks have shown that heavy government spending is just as much Conservative Party policy, and as such the outlook for the UK, general election or not, is likely to feature aggressive fiscal expansion.

Prime Minister Boris Johnson has announced that there will be an emergency budget in the autumn, designed to boost the economy in the face of the ‘no deal’ Brexit threat. Chancellor Sajid Javid has unveiled an immediate £1.1bn cash injection, with scope for £1bn more if necessary.

Johnson has promised to recruit around 20,000 more police officers and to spend an additional £4.6bn on education by 2022/23. Theresa May, for her part, pledged a £2bn pay rise for public sector workers as one of her final acts as Prime Minister.

In the euro area, the situation is rather different. European Central Bank (ECB) President Mario Draghi recently repeated his call for governments to step up their spending, with the outlook for the eurozone getting “worse and worse”. Yet Draghi has no power over fiscal policy and, as ever, nobody seems to be listening.

In light of this lack of fiscal support, the ECB has signalled that it might cut interest rates and resume quantitative easing. That would reinvigorate the hunt for yield in the eurozone, forcing investors further up the yield curves.

Consequently, while the UK has been heading towards a steeper gilt curve, the ECB is on course for curve flattening; something we are capitalising on in our funds with an underweight position in long gilts versus an overweight in eurozone equivalents.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.