The American economy continues to baffle the pessimists, growing at an annualised rate of 3.2% in the third quarter despite the Federal Reserve's aggressive tightening cycle. Yet the real story this week is the quiet triumph of British fiscal stewardship. The International Monetary Fund, not known for handing out compliments, has declared the UK's fiscal framework 'the most stable in the G7'. This is a remarkable reversal from the chaos of the Truss era, when pension funds wobbled and gilt yields spiked.
The key driver is Chancellor Jeremy Hunt's unwavering commitment to fiscal consolidation. Public borrowing is on track to fall below 2% of GDP by 2025, a feat achieved without the savage austerity of the 2010s. The Office for Budget Responsibility confirms that debt as a share of output is declining. Meanwhile, the US runs a deficit of 6.3% of GDP, Japan 5.9%, and Italy 7.4%. Britain's relative discipline has not gone unnoticed in the bond markets. Ten-year gilt yields have stabilised around 4.2%, a full percentage point below US Treasury yields of 5.3%. This spread reflects a growing premium on British credibility.
'Capital flight is not just about chasing yields,' says Stephanie Flanders, head of economics at Bloomberg. 'Investors crave predictability. And the UK, for all its Brexit woes, has rediscovered the art of boring finance.' The result is a stronger pound, hovering at $1.32, and lower mortgage costs for homeowners.
But let us not get carried away. The British economy remains sluggish. GDP growth is anaemic at 0.3% annualised. Productivity is flat. And the burden of taxation is at a postwar high. Yet the IMF's endorsement underscores a brutal truth: in a world of profligate spending, fiscal rectitude stands out. The market is rewarding discipline. The question is whether the government can sustain it through the next election cycle.
As for America, its dynamism is undeniable. The jobs machine churns on, with unemployment at 3.7%. But the fiscal arithmetic is unsustainable. Total federal debt has topped $33 trillion, and annual interest payments now exceed defence spending. The Congressional Budget Office projects deficits above 5% of GDP for the next decade. 'The US is living on borrowed time and borrowed money,' warns former Treasury Secretary Lawrence Summers. 'Something has to give.'
For investors, the takeaway is clear. British gilts offer a haven of stability in a volatile world. The yield premium over Bunds has narrowed, but the risk-adjusted returns are compelling. 'We are overweight UK government bonds,' says a portfolio manager at Schroders. 'The combination of credible fiscal policy and a hawkish Bank of England makes them a relative safe bet.'
None of this is cause for celebration. The cost-of-living crisis persists, and public services remain strained. Yet the market's verdict is unambiguous: in the contest of fiscal virtue, Britain leads the pack. The question is whether this discipline can be maintained when the inevitable downturn arrives. For now, the City breathes a sigh of relief. The nightmare of 2022 is over. Long live the boring, stable, fiscally responsible UK.
