Bank of England Governor Andrew Bailey has warned that slow economic growth and repeated supply shocks are weakening public finances, making it harder for governments to support citizens during downturns. In a speech prepared for the Istanbul Economic Forum, Bailey cited Russia’s war in Ukraine and the conflict in the Middle East as significant supply shocks that strain fiscal stability.
Bailey emphasized that lower growth and frequent shocks reduce governments’ ability to use their balance sheets to cushion economic downturns. He noted that higher borrowing costs and weaker growth intensify demands for increased spending, while financial market doubts about fiscal policy can drive up government borrowing costs. The yield on 10-year UK government bonds, or gilts, reached about 5.53% on Thursday, the highest level since 2007.
While Bailey clarified that it is not his role as a central banker to comment on fiscal policy, he stressed the importance of credible fiscal rules directed at stability. Chancellor John Healey faces reduced fiscal headroom ahead of the autumn Budget, with estimates showing it has narrowed from £23.6 billion in March to £11.3 billion due to inflation and higher borrowing costs.
Bailey warned that continued conflicts, such as the war in Iran, could further restrict energy supply, push up inflation, and weigh on growth, potentially wiping out the remaining fiscal headroom.