During and immediately after the pandemic, governments and central banks worldwide did everything possible to support their economies. Yet, in the years since, meaningful belt-tightening has not materialised.
The picture in the US
Much of the attention has centred on the United States, first with the Inflation Reduction Act under President Biden, and now with continued fiscal expansion under President Trump via the One Big Beautiful Bill Act.
President Trump’s tariffs have, for now, acted as a revenue raiser for the US federal government, helping to keep the deficit lower than many expected at the start of 2025. However, should the Supreme Court rule against the way the administration implemented tariffs, businesses could be owed refunds which might lead to a significant increase in the deficit.
The US can largely get away with deficits due to its status as the world’s reserve currency, but it does not have complete impunity. The mid-term elections in 2026, with the House of Representatives and several Senate seats up for grabs, will be crucial. The House controls budgetary matters, and if it flips to the Democrats, as current polling suggests, some of President Trump’s agenda could face increased resistance, acting as a speed bump on some of his fiscal ambitions.
How this compares to the UK
The UK has not enjoyed reserve currency status for over a century and cannot behave like the US when it comes to budget deficits. The current Labour government has recently discovered this, with the backpedalling of welfare reforms following a backbench rebellion earlier this year.
In early 2025, investors started to demand more compensation for holding gilts (UK government bonds), reflected in higher yields. Combined with weakening growth assumptions, this led to a second round of significant tax increases by Chancellor of the Exchequer Rachel Reeves in November 2025. The Labour government will need to demonstrate discipline to the markets on both sides of the ledger – revenue and spending – otherwise the premium investors currently demand for gilts compared to other markets will persist if not expand. Stability is needed, but with local authority elections approaching in May 2026, should Labour underperform, Keir Starmer will be under increasing pressure. Any change in leadership would likely be accompanied with a new set of tax and spend policies.
Changing roles in Europe
Across the Channel, France cannot be ignored. The French parliament has been in disarray since President Macron’s gamble with a parliamentary election after the 2024 European elections, whilst trying to reform the pension system. This backfired, resulting in gridlock in Paris for the past two years and numerous Prime Ministers.
Presidential elections are due this year (and potentially parliamentary elections). With little appetite from either side to tighten spending, it could result in some instability across the Eurozone. Meanwhile, Germany is embarking on multi-year fiscal expansion funded by deficits, leaving the likes of Greece and Italy as the unlikely voices – given their previous debt struggles – of fiscal responsibility in the bloc.
Little cushioning for fiscal spending
This lack of discipline and political will across the west is no longer cushioned by ultra-low interest rates or central bank support. The era of quantitative easing – where central banks increase the money supply by buying bonds, providing liquidity to the financial system – is now a distant memory. The Bank of England (BoE) and the European Central Bank (ECB) are still running quantitative tightening programmes, where money is slowly removed from the system.
Economies are not growing fast enough to melt away debt, bringing a narrative around currency debasement into focus – where currencies lose their value, impacting purchasing power. This can be reflected in rising asset prices and commodities like gold, as we have seen.
2026 will be politically noisy, but it is the tangible outcomes from policy and the ability to pass laws that will help determine whether this theme moves front and centre into bond and currency price action, or fades into the background as is often the case.
About this update: This video was filmed on 8 December 2025.
Source for Outlook data: MacroBond, J.P. Morgan Personal Investing and Bloomberg.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this update. Always do your own research.