Bank of England Governor Bailey warned rising borrowing costs and weak growth
are eroding governments' fiscal capacity and could leave them unable to mount an
effective response to a future recession. He said higher borrowing costs and
sluggish growth push up government debt-to-GDP while calls for greater fiscal
spending are increasing; if markets doubt fiscal trajectories, bond yields would
rise further, creating a negative feedback loop. Bailey added that although
governments have historically countered severe downturns by borrowing and then
rebuilding fiscal space as growth recovered, repeated shocks, weaker potential
growth and rising debt levels are making that increasingly difficult approach.
