The spectacle from Washington continues. In a move that has markets shrugging rather than shuddering, the Trump administration has announced it will comply with a court ruling to halt a $1.8bn fund. A pittance in the grand scheme of Federal spending, but the optics are telling. Here in London, the Treasury is quietly smug. The Chancellor has held the line on fiscal discipline, refusing to be sucked into a spending vortex that would have gilt yields spiralling and the pound under siege.
Let us be clear. $1.8bn is roughly 0.03% of US GDP. In normal times, this would be a rounding error. But these are not normal times. The Trump administration has made a theatre of deregulation and tax cuts, only to be tripped up by a judicial check on its largesse. The fund in question, tied to environmental and social programmes, was always going to be challenged. That the White House has rolled over without a fight suggests either a strategic retreat or a recognition that the legal ground is shaky. Markets, ever the pragmatist, have barely flickered. The S&P 500 continues its drift higher, buoyed by tech earnings and the promise of rate cuts later this year.
Across the Atlantic, the contrast could not be starker. Britain, ever the temple of fiscal orthodoxy, is holding its line. The Chancellor has repeatedly said that inflation is the enemy, not the deficit. And to be fair, there is some logic. With core CPI still hovering above 4%, the last thing the economy needs is a fiscal sugar rush. The bond market has rewarded this prudence. Ten-year gilt yields have fallen to 4.1%, a full 50 basis points below their US equivalents. That gap is a vote of confidence in UK fiscal management, even if the growth outlook remains anaemic.
But there is a risk. By clinging too tightly to austerity, the Treasury may miss the opportunity to invest in long-term growth. Infrastructure, green energy, digital transformation: these require patient capital, not just balanced books. The Chancellor's mantra of 'sound money' is admirable, but it risks sounding like a broken record when the economy is flatlining. The OBR has already downgraded its growth forecasts, and the IMF is warning that UK output will be the weakest in the G7 next year. At some point, fiscal discipline becomes a self-defeating prophecy.
Meanwhile, capital flight from the US is real but measured. The dollar has weakened slightly against the pound, but not enough to trigger alarm. The real story is the rotation out of US Treasuries into Gilts, a classic risk-off move. British bonds are seen as a haven in a world of political uncertainty. The Trump administration's court defeat only reinforces the sense that US governance is fractious and unpredictable. Britain, with its stable government and independent central bank, looks like a safe pair of hands.
Yet this stability comes at a cost. The Bank of England has kept rates high, choking off domestic demand. Mortgage rates remain elevated, and the housing market is stagnant. The irony is that while the US dithers with its $1.8bn fund, Britain is stuck in a low-growth equilibrium. The Chancellor's 'fiscal headroom' is a mirage if it never gets spent. Perhaps it is time to borrow for the future, not just for the present. The market can handle a bit of stimulus, provided it is targeted and temporary.
In the end, the story is one of different styles of fiscal management. Washington is chaotic but flexible. London is disciplined but rigid. The markets will judge which approach pays off in the long run. For now, the prudent hedge is to hold both Gilts and dollars, and wait for the inflation storm to pass.
