The American economy has once again confounded the pessimists, posting a robust 3.2% annualised growth rate in the third quarter, according to the latest GDP figures from the Bureau of Economic Analysis. This defiance of gravity has not gone unnoticed in Whitehall. Chancellor Jeremy Hunt, in a carefully timed statement, declared that the UK has ‘much to learn’ from the United States’ approach to fiscal discipline and tax incentives. But as a gimlet-eyed observer of these matters, I cannot help but wonder whether the Chancellor is cherry-picking his data.
Let us examine the numbers. The US expansion is being fuelled by a combination of factors: a resilient labour market, consumer spending boosted by pandemic-era savings, and a productivity surge driven by artificial intelligence and technology investment. Yet beneath the headline, there are fissures. The personal savings rate has fallen to 3.5%, well below the pre-pandemic average. And the national debt has ballooned to 120% of GDP, a figure that would make even the most spendthrift chancellor blanch. The Federal Reserve’s aggressive tightening cycle has cooled inflation from 9% to 3.7%, but the cost of servicing that debt is rising sharply. In the current fiscal year, interest payments on US public debt will exceed $870 billion, more than the entire defence budget.
Hunt’s applauding of ‘low taxes and limited regulation’ is, at best, a partial reading of the tea leaves. The US corporate tax rate sits at 21%, compared to the UK’s 25% which is due to rise to 28% in 2024. But American companies benefit from a labyrinth of loopholes and deductions that the OECD’s Base Erosion and Profit Shifting (BEPS) project has only partially closed. Moreover, the UK’s fiscal position is markedly different. Gilt yields have spiked to 4.7%, reflecting a market that is deeply sceptical of the government’s ability to control borrowing. The Office for Budget Responsibility projects that UK public sector net debt will reach 104% of GDP by 2027-28, without a clear path to reduction.
Capital flight is a perennial worry. Since the disastrous mini-budget of September 2022, international investors have demanded a higher risk premium to hold UK assets. Sterling has weakened by 5% trade-weighted over the past year. The US dollar, by contrast, remains the safe haven of choice. When the market smells weakness, it punishes the pound first. The Chancellor’s enthusiasm for ‘American-style dynamism’ must be tempered by the reality of Britain’s structural deficits: a current account deficit of 4.2% of GDP, a productivity growth rate averaging 0.5% since 2008, and a housing market that absorbs far too much capital.
There are, however, genuine lessons. The US has a more flexible labour market, with lower unionisation and fewer employment protections. Its bankruptcy system allows for faster restructuring of failing companies. Its energy independence has shielded it from the supply shocks that have afflicted Europe. But copying these features would require a political revolution the current government has no stomach for. Instead, Hunt’s rhetoric seems designed to deflect attention from the upcoming Autumn Statement, where he will likely announce tax increases and spending cuts to meet his fiscal rules.
The market reaction to the US data was instructive. The S&P 500 rose 0.8%, but 10-year Treasury yields also inched up to 4.9%, as traders priced in a higher ‘neutral rate’ of interest. This is the paradox of good news: it can tighten monetary policy by anticipation. For the UK, the lesson is not simply to mimic US policy but to understand the unique circumstances that allow it to work. The US issues the world’s reserve currency; it has a central bank that is both independent and credible; it has deep capital markets that can absorb shocks. Britain has none of these in abundance.
So when the Chancellor says ‘we must learn from America’, the sensible investor should ask: learn what exactly? Lower taxes without spending cuts? That ship sailed. More immigration? The political temperature is against it. Deregulation in financial services? Already underway but marginal. The US economy defies odds because it is a continental economy with vast resources and a demography that is still youthful compared to Europe. The UK is a medium-sized island nation with an ageing population and a housing crisis. That is not defeatism; it is arithmetic.
In conclusion, the Chancellor is right to look across the Atlantic for inspiration, but wrong to suggest that the medicine is easily transferable. Fiscal responsibility is not about copying someone else’s success; it is about making the hard choices at home. Until the UK addresses its productivity malaise, its housing shortage, and its tax and spend imbalance, the gilt market will continue to cast a long shadow. And no amount of talking up the American dream will change that reality.
