Trump’s victory presents a momentous opportunity for Britain

Donald Trump
Should Donald Trump’s approach to the economy prove successful they could prompt a shift in British policy making - REUTERS/Brian Snyder/File Photo

What a couple of weeks. After the Budget, we’ve had interest rate cuts at home and in the US and overwhelming all this, the US election, whose effects could be momentous.

The result was more clear-cut than almost anyone had imagined. It looks as though the Republicans will manage to achieve a clean sweep, winning both Houses of Congress as well as the presidency, giving Donald Trump more power over the economy. Winning the popular vote as well gives him more moral authority. Whatever we imagined before last week’s vote, this is probably going to be an extremely radical presidency.

Owing to the peculiarities of the US system, Trump doesn’t actually take office until two months’ time. Mind you, in the meantime, he can say things. And with Trump that can be dangerous. Markets will surely be agog during this awkward interim phase to get a clue as to what he is likely to do.

We can be pretty sure that there are going to be some significant tax cuts and, even though he will seek to reduce spending in areas that he doesn’t approve of (including aid to Ukraine and green subsidies), he is likely to be distinctly unbothered about the prospect of the US fiscal deficit rising further.

Trump is going to have a difficult relationship with the Fed. The thrust of his policies will be to boost aggregate demand and raise the inflation rate, thereby making it difficult for the Fed to cut rates much further. With his commanding political position he will surely give the Fed chairman, Jay Powell, a pretty rotten time. Although Powell has said that he would not resign, it is by no means impossible that he will stand down, allowing Trump to replace him with someone more pliable, which the markets would not like.

Jerome Powell,
Jay Powell has said he will remain in his role as chairman of the Fed - Ting Shen/Bloomberg

The US can get away with things financially that other countries simply can’t. Even so, many a good judge reckons that the US is inviting a fiscal crisis some way down the line. For other countries, such a crisis could come a good deal sooner. Especially if it ends up being mirrored by a large stimulus in China, Trump’s fiscal stimulus could drive up global real interest rates, thereby making debt service burdens more onerous.

This is going to be particularly difficult for many countries that have extremely high ratios of government debt to GDP. The UK falls into this camp and if the recent rise in gilt yields is extended further as US yields are forced up, then this will place our Chancellor in a difficult position.

As it is, she left very little headroom against her new fiscal rules. That buffer has probably already been largely used up by the increase in bond yields that has occurred since the Budget. If yields were to rise a good deal further then she would really be on a sticky wicket.

We are used to the idea that Italy has a serious issue, with its debt to GDP ratio running at 137pc. But France isn’t far behind. Its debt to GDP ratio is 110pc. And its budget deficit is running at over 6pc of GDP. This would be testing for any government but in the French case things are made more difficult by the fact that there is a minority government and there is no really serious political appetite for a programme of deficit reduction.

Perhaps the greatest impact from President Trump’s victory on other countries in the West, including the UK, will be the demonstration and competitive effects of a completely different policy setting. Under Trump, there is going to be a drive towards lower taxes, personal and corporate, deregulation and a scaling back or abandonment of various types of green spending.

Of course, the Trump package could blow up in a bout of higher inflation, accompanied by higher interest rates and bond yields. But suppose this package delivers strong economic growth. How would we react? This would surely be a powerful factor in driving the Conservative party towards rediscovering its inner Thatcher. It might even pose serious questions for the Labour Government if, as I suspect, after the initial boost from the Budget stimulus fades, UK growth disappoints.

Trump has been sabre rattling about trade imbalances and has threatened to impose significant tariffs on imports into America. Even so, the Labour Government faces an enticing opportunity in the form of a possible trade deal with Trump’s America. This was a non-starter under President Biden and would presumably also have been impossible if Kamala Harris had become president. But it could happen under Trump.

Mind you, although a considerable amount of preparatory work has been done, there is no doubting the barriers to securing a deal. We have to be aware that the benefits of trade aren’t only about securing stronger exports. They are also about securing cheaper imports. And we would need to face up to the inevitable concessions on US food exporters’ access to the UK market.

There is also a huge barrier in the form of various Labour figures’ previous utterances about President Trump, especially those of our Foreign Secretary, David Lammy. It was grating to hear Emily Thornberry, now chairman of the House of Commons Foreign Affairs Committee, making disobliging remarks about Trump in the wake of his sweeping election victory.

Labour’s leaders should take a leaf out of Winston Churchill’s book. Referring to Hitler’s invasion of the Soviet Union, an erstwhile foe of Churchill’s for many a year, in June 1941 he said: “If Hitler invaded Hell I would make at least a favourable reference to the Devil in the House of Commons.”

It would be ironic if a Labour Government, led by ardent Remainers, secured a trade deal with the US, doing more to take advantage of Brexit than anything that the previous Conservative government had managed. If only.

Roger Bootle is senior independent adviser to Capital Economics and a senior fellow at

Policy Exchange. roger.bootle@capitaleconomics.com