The Bank of England
Rising national debts threaten to undermine the British economy and will push up borrowing costs for households, businesses and the Treasury, the Bank of England has warned.
Heavy government borrowing around the world, led by China and the US, threatens to push up interest rates worldwide, the Bank said in its Financial Stability Report (FSR), published on Friday. Countries including Britain are increasingly in debt, officials noted, making Britain highly vulnerable to changes in interest rates.
The Bank said in its FSR: “High government debt levels in major economies could impact financial stability in Britain and interact with other risks. Specifically, a deterioration in market perceptions about the sustainability of the long-term trajectory of global sovereign debt could lead to higher interest rates.”
The Bank noted that interest rates on the financial markets had already risen since then Rachel Reeves’ budget last monthin which the Chancellor announced major new financing plans.
A similar pattern has occurred in the US since the election of Donald Trump as the next US president. Market interest rates have risen in response to Trump’s promise of significant additional tax cuts, which are expected to force the world’s largest economy to borrow more.
Global government debt is expected to rise to 100% of global GDP by the end of this decade, while US debt will top 130% of GDP. Public debt in China is expected to rise from less than 100% of GDP today to more than 110% of GDP in the coming years.
At last month’s budget, the Office for Budget Responsibility predicted that the UK’s national debt would rise from £2.7 trillion at the end of the last financial year to £3.4 trillion by the end of the decade.
Rising debt increases the risk that a shock to the markets will send interest rates spiraling higher, hurting economic growth further increase debt.
Andrew Bailey, the Bank’s Governor, said: “Global risks related to geopolitical tensions, global fragmentation and pressures on sovereign debt levels remain material. And the uncertainty around and risks to the outlook have increased.”
“Global risks related to geopolitical tensions, global fragmentation and sovereign debt pressures remain material. Uncertainty and risks to the outlook have increased,” the Bank said in its FSR, noting continued financial pressures from an aging population, climate change and defense spending.
Any interest rate shock would hit household finances as they “tend to tighten credit conditions for households and firms as government debt interest rates affect borrowing costs for the real economy.”
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Mr Bailey said: “We have some very big headwinds working against us. The three I would like to single out are aging – Britain is not at all unusual in this respect, it is common in all industrialized countries – and the consequences of aging.
“The second thing I would pick out is the fact that the post-Cold War dividend in terms of defense spending has unfortunately come to an end. The third is climate change.”
Bank officials also warned of the growing risks of a trade war. One of Trump’s most important election promises was to impose tariffs on imports, with particularly high taxes on products from China.
“Global fragmentation, namely a reduction in the level of international trade and policy cooperation, could have several consequences,” the Bank said.
“It could dampen growth and increase uncertainty about economic outcomes, including around inflation, which could in turn lead to volatility in financial markets.”
Meanwhile, banks have also been warned that geopolitical tensions could increase the risk of cyber attacks by hostile powers.
“Higher geopolitical tensions are also creating an environment of increased risk of cyber attacks,” Mr Bailey said, warning: “It has risen very quickly in the rankings (of the risks banks face).”
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