The upcoming US election on 5th November potentially represents a critical inflection point for the global economy. Its outcome is likely to impact the UK, particularly in areas such as trade, foreign affairs, and crucially for local authorities, the gilt market.
To analyse the effects of the presidential election on UK gilts – and consequently on borrowing costs from the PWLB – we must consider how each candidate’s fiscal policy might influence the US monetary stance, affecting international capital flows, exchange rates, and trade.
The Committee for a Responsible Federal Budget (CRFB), the US equivalent of the Office for Budget Responsibility (OBR), a bipartisan congressional body focused on budgetary analysis and education, estimated how each candidate’s current fiscal plan would affect the US national debt by 2035.
The report suggests that Trump’s plan would increase the national debt by $7.5 trillion in the central scenario, with a range from $1.45 trillion to $15.15 trillion in the low and high cases. In contrast, Harris’s plan is projected to increase the national debt by $3.5 trillion in the central scenario, with estimates ranging from no increase to $8.1 trillion in the low and high cases, respectively.
Thus, both candidates, if elected, would perpetuate the US’s structural deficits without meaningfully addressing the national debt burden. However, Trump’s platform may add twice as much debt as Harris’s plan and could increase the national debt by over 40% by 2035 in the high-case scenario.
In either scenario, the increase in spending and national debt would likely be broadly inflationary. Given the continued strength of the US economy – recently underscored by strong non-farm payroll data – continued fiscal expansion could lead to overheating, prompting the Federal Reserve to reconsider the pace and extent of its easing cycle.
A more gradual easing cycle by the Federal Reserve could result in a great divergence between the UK and US interest rates. If US rates remain elevated compared to expectations, US Treasuries may become more attractive to international investors compared to UK gilts, potentially leading to relative outflows from the gilt market. This shift in investor preference could exert selling pressure on UK gilts, driving down their prices and pushing yields higher as a result.
Additionally, a slower US easing cycle and persistently higher rates could strengthen the dollar as foreign investors purchase dollars to invest in US assets. This could lead to a depreciation of the pound, making imports more expensive and increasing net exports. The weaker pound could also import inflation into the UK, as imported goods and services become more costly. As a result, a slower US easing cycle may pressure the Bank of England to delay rate cuts, leading gilt yields to rise as the market adjusts its expectations for near-term rates.
The outlined effects could occur regardless of the winner; however given the larger scale of Trump’s proposed budget, these impacts could be more pronounced under his presidency.
While the size of each candidate’s spending plants may influence the gilt market, their proposed methods for financing these plans differ significantly. Notably, Trump intends to fund his large spending program through a blanket tariff of 10-20%. Given that the US is the UK’s largest export market, accounting for £191.5 billion, or 22.1% of total exports in 2023, such a tariff could have a substantial negative impact on the UK’s trade balance. This reduction in net exports would likely decrease GDP and exert additional pressure on the pound. Consequently, the Bank of England might be compelled to slow its easing cycle, resulting in higher gilt yields.
In conclusion, while this analysis has its limitations and global economic/market conditions are influenced by many factors, making it difficult to consider one in isolation, both Trump and Harris presidencies are expected to increase the US national debt by increasing spending/reducing taxes, potentially prompting the Federal Reserve to slow its monetary easing cycle. Under Trump’s plan, which involves a larger debt increase and the introduction of significant tariffs, the impact on the UK gilt market could be more pronounced. Both policy platforms may draw investors away from UK gilts or lead the Bank of England to slow its own easing cycle, resulting in higher borrowing costs in the UK.
If you would like more information on borrowing cost projections or financial forecasting, please contact us at treasury@arlingclose.com or on 08448 808 200.
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