Business Insider UK government spending cuts will mean the country’s finances will be more vulnerable to a global economic downturn in the coming months, the UK’s central bank has warned.
The Treasury has cut its capital spending target to the low single digit billions for the first time in six years, while the Bank of England has cut interest rates to near zero to bolster the economy.
The Bank of Scotland has also cut interest rate cuts by 25 basis points to help the economy recover.
But economists said the changes in the UK would be felt across the world, with global financial markets now expecting further global austerity measures.
Capital spending is expected to rise to £10bn in 2019-20 from £8bn in 2018-19.
“This is a huge step in the right direction but in my view the UK will have to be prepared to continue to adjust and adjust in the event of a global financial shock,” said Nick Cloonan, director of macroeconomics at the Institute of Directors.
“We do not know what the extent of global economic weakness will be but it is already clear that global demand will decline as a result of the global financial crisis.”
That is already a concern for the UK, as well as for its neighbours.
” Capital is currently expected to fall to £9.5bn by 2019-21, according to an analysis by Capital Economics.
The UK has a large amount of public debt and interest on that debt, which will have an impact on the economy when a global downturn does strike.
“The UK will continue to be exposed to financial shocks as a consequence of the current economic and financial uncertainty, which is likely to result in a further reduction in the government’s debt position and in the risk of a downturn in global financial conditions,” said Andrew Hunter, director at Capital Economics, in a report.
The UK’s financial position was strengthened by the UK government’s recent decision to delay a new round of budget cuts until 2021.
The Bank said its policy was to keep interest rates at a “stable level”, but would adjust rates to a “faster pace” if needed. “
The Bank is now less worried about a rise in the national debt than about a reduction in public debt, and is more worried about the rise in debt in relation as it relates to the public finances,” he said.
The Bank said its policy was to keep interest rates at a “stable level”, but would adjust rates to a “faster pace” if needed.
A spokeswoman for the Bank said the UK is currently “very much” in surplus.
Earlier this month, the Bank’s Governor Philip Lowe said the government had the financial flexibility to respond to any “unexpected shocks to the financial system” with measures such as the levy on bank debt.
It is unclear if this means the government is expected back in surplus, or if it will be able to take a further cut in the next financial year.
In the latest economic update on Tuesday, the IMF said the outlook for global growth remained “broadly positive”.
“We expect global growth to remain resilient over the medium term and to strengthen over the next two to three years,” the IMF’s Managing Director for Emerging Economies, James Winter, said.