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 consequences of the Iran war.
As of Friday, interest-rate futures indicated investors saw only about a 10% probability of a quarter-point increase at the MPC’s September meeting. However, the implied probability of such an increase at the subsequent November meeting had risen above 60%, Reuters reported.
Why rising government borrowing costs matter
Persistent government debt pressures could restrict the choices available to governments because a larger share of public revenue may be required to cover debt-interest payments.
For the UK, movements in gilt yields are particularly important for the Treasury because higher refinancing costs can affect the fiscal headroom available for spending, taxation and investment decisions.
Bailey’s comments also underline that the pressures are international. Governments across advanced economies face common challenges from demographics, productivity performance, defence requirements and the lasting fiscal effects of major economic shocks.
What happens next?
Attention will now turn to the Bank of England’s September Monetary Policy Committee meeting and subsequent economic data for indications of how policymakers assess inflation and borrowing conditions.
Bond investors will meanwhile continue to assess whether governments can manage rising expenditure and debt while maintaining credible long-term fiscal plans. Bailey’s comments suggest that the forces affecting sovereign borrowing costs are unlikely to be explained by short-term market movements alone.
