The Fiscal Position. A Nelsonian Eye to a Structural Problem

No one cares but they should. This note updates our thoughts on the UK's fiscal position and concludes that while there is an apparent improvement the system remains highly vulnerable to shocks. We believe the structural problem is largely unresolved however for a variety of reasons, which are largely political, we think the Government will seek to loosen the pure strings beyond current consensus expectations, initially gradually, but potentially by as much a as 1% GDP by 2020/1, as the temptation to spend increases.

We explain why we think this has profound capital market implications, longer term, making it very hard to step-off the monetary treadmill. Further, we re-model differing scenario's which underlines the cyclically and fragile nature of the public purse. Growth stagnation would lead to a £85bn deficit while a 2% recession would cause a deeply worrying £137bn deficit. While this remains a tail risk it demonstrates why HMG and the Central Bank will be highly unlikely to unwind the monetary stimulus of recent years.

We have misgivings about this policy and its longer term implications both in terms of impacting longer term growth potential via crowding out and also asset price distortion. However short term enjoy the ride. Please contact us for a copy of the note