Standard Life Investments head of global strategy Andrew Milligan says UK government plans to increa...
Standard Life Investments head of global strategy Andrew Milligan says UK government plans to increase borrowing could be under threat from reflation policies pushed by a supply-side-friendly US administration.
Rising US inflation will make it more expensive to sell UK government debt because investors will demand higher guaranteed yields as returns fall relative to stock market investments.
This will pose a headache for chancellor Gordon Brown, who is widely tipped to use this week's pre-Budget statement to introduce new borrowing targets in order to overcome a downturn in corporate tax revenues this year.
"Bonds are pricing in low inflation or even deflation," Milligan says.
"But were there talk of reflation in the US it would discourage investors from staying in fixed income, in bonds, gilts or treasuries."
Ultimately, US supply-side policies could narrow the UK government's room for manoeuvre in covering income shortfalls in the longer term, Milligan says.
He feels that the Bush administration wants to stimulate the economy through tax cuts ahead of the 2004 presidential elections, using tactics pioneered by the first Reagan administration.
That time it was the threat of Soviet aggression that was used to great effect to ram through huge increases in budget spending, while following through on pledges to cut taxes.
This time there are other security concerns, but the effects on the UK will not be any smaller for that.
"The Republicans are in control but they only have two years in which to introduce fiscal reform. They know they have got to get the economy right in 2004 because the balance is incredibly tight. It could take just a few hundred thousand votes in certain key states to get the Democrats back into the White House," Milligan says.
Gordon Brown will still be able to carry through his plans in the short to medium term, when the "borrowing numbers will be acceptable," he adds.
But as UK government debt rises towards self-imposed limits so does the risk of an outside event causing a shock that could undermine fiscal policy.
In terms of specific announcements in Wednesday's pre-Budget statement, Milligan says he is going to keep an eye out for seemingly innocuous intents that "could have longer term implications and represent the thin end of the wedge".
He cites changes to ACT and NI for high rate payers as past examples, and says the government could choose to "muddy the waters" by altering the timing of the current business cycle to include large payments for 3G telecommunications licences.
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