Weak demand is the real fiscal threat

Renewed concerns over the UK’s fiscal position have centred on suggestions that, with less spare capacity in the economy than previously thought, the structural budget deficit is correspondingly bigger. This might suggest that the Government needs to cut spending further or raise taxes to meet its main fiscal mandate. But the bigger threat to the fiscal outlook is the prospect of a prolonged period of weak growth, itself driven primarily by deficient demand. Against that background, bond markets will continue to focus on the wider implications of that weakness, including the prospect of a further prolonged period of very low official interest rates.