The newly elected European governments are facing challenging fiscal situations and bear the task of implementing reforms in the face of limited resources.
State debt is nearing its highest levels in decades both in France and the United Kingdom, where recent elections ushered in new leadership. Government expenditures and budget deficits remain above pre-pandemic levels, economic growth is sluggish, borrowing costs are rising, and demands on public funds are increasing.
Economists suggest that fiscal constraints will be necessary—either through expenditure cuts or higher taxes. However, political leaders have not prepared voters for such measures, instead promising new ambitious plans.
In France, the far-right National Rally, expected to gain the most seats in parliament, proposes tax cuts and reversing the increase in retirement age, while the left-wing New Popular Front has an even more ambitious program including freezing prices and raising the minimum wage without committing to deficit spending. France’s government bond yields have sharply risen, and in May, Standard & Poor’s downgraded the sovereign debt rating.
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In the United Kingdom, the Labour Party, holding a historic majority, plans to increase spending on public services like the National Health Service, though their proposals remain moderate. The Institute for Fiscal Studies criticizes major parties for avoiding difficult fiscal decisions.
According to the International Monetary Fund, public debt in the United Kingdom has risen to 104% of GDP, and in France, to 112% of GDP. Even traditionally fiscally conservative Germany has shifted from budget surplus to deficit, with Chancellor Olaf Scholz’s coalition recently reaching an agreement on a budget aimed at stimulating economic growth and military expenditures.
The United States faces an even greater challenge as its national debt reaches 123% of GDP. However, political pressure to address the deficit is weak due to stable economic growth and the dollar’s reserve status, which makes U.S. bonds more attractive to investors.
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Historically, high levels of state debt have been reduced through strong economic growth and reductions in military spending, but current circumstances make such measures difficult. Increased public expenditures on healthcare and pensions due to an aging population are likely to rise further. This raises concerns that ultimately investors may hesitate to buy government bonds.
Italy’s Prime Minister Giorgia Meloni has so far managed investor reactions by moderately constraining spending plans, but according to research from the Kiel Institute for the World Economy, the long-term economic impact of populist governments is usually negative, with higher debt and inflation and lower GDP growth.
