Banks are warning that as Britain’s economy slows down, the Government will need to take on more borrowing to pay off debts it has racked up as a result of the financial crisis.
The Bank of England (BoE) said that it will need “at least as much” government debt as it had previously said it would take on as part of a strategy to ease pressure on the economy, Reuters news agency reported.
The BoE said that the new strategy would be to borrow from a mix of commercial banks and central banks to help meet a $3 trillion budget deficit, Reuters said.
It said the bank had been “in the process of considering its current balance sheet and balance sheet-weighted cash position”, which it had recently updated to reflect its new approach.
The central bank said it is “increasing its exposure to debt-based assets and to financial assets” and will be “making greater use of these types of assets in the medium term”.
The BoEP said the Government would need to increase the amount of debt it is taking on as a “significant part of the fiscal consolidation strategy” in order to “accelerate economic recovery”.
In its statement, the BoE’s Monetary Policy Committee said that “there is no easy answer” for the Government’s plans.
“We do not think the Government can continue to pursue its current fiscal consolidation programme with a current debt ratio of over 150pc, or that it can remain on the path of increasing the debt to GDP ratio, at a time when growth is slowing,” it said.
“There are multiple sources of downside risks to the financial position of the Government, including the potential for a rise in interest rates.”
The BoEs statement added that it was “confident” that the Government could achieve its objectives in the short-term, as it “is well positioned to address short- and medium-term risks”.
It added that the BoEs decision “was based on the BoEP’s assessment that a debt-to-GDP ratio of 150pc or more is not sustainable in the long-run”.
It said that in the longer term, “it is critical that the UK’s recovery does not become more protracted than the economy can support” and that it would be “appropriate” for “all relevant actors to continue to engage on these issues”.
But it added that this was not the case in the immediate future.
“Given that there is a large-scale economic recovery underway, we do not see it being feasible to continue with current fiscal policy as it currently stands,” it added.
The new strategy comes as UK financial markets continue to tumble after the BoM announced that the government had increased its deficit by 0.5pc of GDP for the third quarter.
The government said that its deficit will remain below the Bank of Canada’s 3pc target for the year and that the debt will be lower than expected.
“This is a significant reduction in the level of debt in the economy,” the BoS said in its statement.
“In addition, the financial sector will be able to continue taking on a further $20bn of additional debt over the coming months.”
The statement added, however, that the “current financial position will be maintained” but said “further action may be required”.
“It is important to remember that the current fiscal position is a reflection of the level and composition of the economy.”
While the BoI had previously projected a deficit of around $1.1 trillion, it said this week that it had revised its forecast to around $2.6 trillion in 2020.”
As a result, the Bank has increased its forecasts for the level, composition and growth of its balance sheet.”
While the BoI had previously projected a deficit of around $1.1 trillion, it said this week that it had revised its forecast to around $2.6 trillion in 2020.
The UK has been in a deep recession since the financial crash of 2008, and the economy has shrunk by around 5pc since then.
Its GDP is projected to shrink by more than 7pc by 2020, while its unemployment rate is forecast to hit 9.4pc.
However, the economy will continue to grow in the next couple of years, with the BoA predicting the economy to grow by 2.5% in 2021.
In its latest statement, it added, “the Government’s fiscal position remains stable and there are no adverse effects to the economy or the financial system”.
“The Government is taking action to support the recovery, such as supporting the growth of the private sector, supporting job creation and creating more public sector jobs,” it continued.
This is in contrast to the BoG’s statement, which it said that there are “negative effects to our financial system” and “negative economic effects”.
Earlier this month, the government said it had increased the deficit by 3.4 per cent of GDP, or $1 trillion in 2016.
It added, though, that it is still “well placed” to support growth and maintain a surplus