The American economy continues to baffle the pundits. With GDP growth humming along at 2.8% and unemployment at 3.7%, the US appears to be the envy of the developed world. Yet beneath the surface, the figures tell a different story. The US national debt has ballooned to $33 trillion, and the federal deficit for 2023 hit $1.7 trillion. This is not sustainable. It is a fiscal sugar rush that will inevitably lead to a hangover.
Meanwhile, the UK, under Chancellor Jeremy Hunt, has taken a more prudent approach. The Office for Budget Responsibility forecasts a deficit of 4.5% of GDP for 2023-24, down from a peak of 15% during the pandemic. Gilt yields have stabilised around 4.2%, reflecting investor confidence in British fiscal discipline. The UK has not resorted to the kind of reckless spending that characterises Washington's approach.
Critics will point to the UK's stagnant growth. GDP is barely above pre-pandemic levels. But growth at any cost is not the answer. The US is borrowing from future generations to fuel current consumption. It is a Ponzi scheme dressed up as prosperity.
Consider inflation. The Fed has raised rates to 5.5%, but core inflation remains sticky at 4.1%. In the UK, inflation has fallen from 11.1% to 6.7%. The Bank of England's independence and the government's fiscal restraint are paying dividends. The pound has strengthened against the dollar, reflecting the market's preference for discipline over debt-fueled growth.
Capital flight is a concern. Investors are watching the US debt ceiling debacle and the political dysfunction. They see a country that cannot manage its finances. In contrast, the UK's fiscal framework, with its commitment to reducing debt as a share of GDP, offers a safe harbour. The yield spread between UK gilts and US treasuries has narrowed, a sign that the market is rewarding British prudence.
Some will argue that the US can grow its way out of debt. But that is fantasy. The Congressional Budget Office projects that debt will reach 181% of GDP by 2053. Interest payments alone will consume nearly a quarter of federal revenue. That is not growth. That is serfdom.
The UK's approach is not without risks. Public services are strained. Taxes are at a 70-year high. But the path to prosperity is through fiscal rectitude, not fiscal incontinence. The US is on a binge. The UK is on a diet. The markets will reward the latter in the long run.
So let the US enjoy its moment in the sun. The hangover will come. And when it does, the City of London will be ready to profit from the resulting capital flight. British fiscal discipline is not just virtuous. It is profitable.
