Bank of England’s Bailey Warns Rising Government Debt Poses Long-Term Risks, London

London, 4 September (Brussels Morning Newspaper) – Bank of England Governor Andrew Bailey has warned that long-term government debt pressures across advanced economies are being fuelled by weak productivity, ageing populations, major economic shocks and demands for increased defence spending, contributing to higher borrowing costs.

Bailey made the comments at a conference hosted by the London School of Economics’ TRIUM Global Executive MBA programme on Friday. His intervention comes as government bond markets face renewed pressure and long-term UK borrowing costs remain at historically high levels.

Bailey highlights structural pressures on public finances

Bailey said advanced economies were confronting significant structural challenges rather than simply a temporary increase in borrowing.

“There are very, very substantial challenges at the moment, structural challenges,” Bailey said.

He identified weak productivity and shocks including the Covid-19 pandemic as factors behind the increase in public debt. Ageing populations and governments’ desire to spend more on defence were also contributing to the longer-term fiscal pressures.

The combination matters because governments generally finance part of their spending by issuing bonds. When investors demand higher yields to hold those bonds, the cost of government borrowing increases.

Bailey said these structural factors were relevant to understanding current government debt pressures and strains in global bond markets.

UK government bond yields remain under pressure

The comments follow a significant rise in government bond yields in recent months.

Earlier this week, yields on 10-year British government bonds reached their highest level in almost two decades, while yields on longer-dated gilts climbed to levels last recorded in 1998, according to Reuters.

Higher gilt yields can have consequences beyond government finances. They increase the cost of servicing newly issued public debt and can influence borrowing conditions elsewhere in the economy, including mortgage and business lending rates.

The developments therefore present a challenge for policymakers attempting to balance public spending commitments with sustainable government finances.

Bank of England remains cautious on interest rates

Bailey’s remarks also come ahead of the Bank of England’s next interest-rate decision.

He voted with the majority of the Monetary Policy Committee in July to leave Bank Rate unchanged while policymakers waited for clearer evidence about the longer-term inflationary