After a slowdown in global growth last year and few levers left for central banks to pull to stimulate the economy, Insight Investment’s April LaRusse says that it might now be time for fiscal policy to be reintroduced to markets.
The Federal Reserve’s three rate cuts last year marked a return to the ultra-low rate environment of the post-crisis era following a brief flirtation with normalisation.
However, with rates already at low rates there is little room for central banks to cut further.
As such, Insight head of investment specialists LaRusse said that while the rates are likely to remain “nice and low” in 2020, fiscal policy may start to become a more important driver of growth.
“When we look back at 2019, we see the restarting of QE, and the reversing of interest rate hikes,” said LaRusse (pictured). “But an acknowledgement of that thing called fiscal policy probably needs to be utilised again.”
While support for fiscal policy has grown more recently as more populist politicians have sought to increase spending, LaRusse said it has been used sparingly due to concerns over levels of debt. 
In addition, the public don’t seem to have the confidence in politicians to execute a policy, said the fixed income specialist, while governments themselves have also wanted to keep central banks and their monetary policies as a scapegoat for low growth.
“I think there's been this almost fear of trusting fiscal policy because fiscal policy is about politicians,” she said.
Distrust of politicians was seen last year – a period of intense political uncertainty.
“They’re the ones making the budget and making the changes and how much is spent and how much is taxed and how high they will allow a government debt to rise to,” LaRusse explained.
“It's almost like those decisions are just too hard and they would rather the central bank just cut interest rates because that's nice and easy and will solve the problem.
“It’s as if ‘we don't have to do anything because the central bank's going to fix it.’ “
She added: “The problem is when interest rates get so low, that another cut just doesn't help.”
But this has to change, according to LaRusse.
“If you have your foot on the brake by having tight fiscal policy – i.e. not spending a lot and keeping taxes pretty high – and you also have your foot on the gas with low interest rates, the economy doesn't move forward very fast,” she explained.
“If you take your foot off the brake you might actually see more sustained growth.”
Fiscal policy was a theme of the UK general election, as the Conservative party’s Boris Johnson pledged more money on things like the NHS and police service.
This would make sense, said LaRusse, but the UK is one place where a rate cut can be pencilled in because of the weakness of the economy and uncertainty surrounding Brexit.
Fiscal policy is likely to be deployed in Europe and has already been utilised in the US in the form of president Donald Trump’s tax cuts shortly after election.
The scope for monetary policy has also become more limited recently with the advent of negative rates, as government bond investors now face the prospect of a “guaranteed loss”.
As such, there could be a migration of investors into riskier assets for positive yields.
“Ultimately for those of us who need to save money for our futures, the point of investing is to earn some money,” said the Insight fixed income specialist.
“So, you're forced – even if you don't want to – to take more risk because what are you going to do when they offer negative return?”
As such, the lower rates for longer has created an “accidental problem,” LaRusse explained.
“They [central banks] wanted to cut interest rates to stimulate growth and wanted to encourage companies to borrow money, [so] they make it nice and cheap,” she said.
“They wanted to improve the healthiness of the banking sector. There were all these really great reasons for doing this.
“But you don't really want to do it for too long because it can cause all sorts of unintended damage to other parts of the economies and to savers.
She added: “The idea of wanting to use some other policy tool like good old-fashioned fiscal policy now is probably quite sensible because really what you’d quite like to do is get interest rates just back to something vaguely positive.
“It doesn’t have to be a big positive number, but it would make more sense.”
“So, you know, be careful about encouraging that sort of level of behaviour for too long at an extreme level. But, you know, hey, I'm not running the world,” LaRusse concluded.