>You are a finance minister after a decade of meagre economic growth, shocks from a financial crisis, a pandemic and sky-high energy prices. Public debt is worth more than your country’s gross domestic product, interest rates are at their highest in years and merely servicing outstanding debt is taking up an ever-greater share of tax revenue. Inflation is stubborn. America’s profligacy is satisfying much of the world’s appetite for government bonds, meaning your debt must pay more to attract investors. You lie awake worrying about how to make the numbers add up. Your fellow ministers, meanwhile, fret for their careers: populist parties are on the rampage. The economic context calls for fiscal consolidation; the political one warns against austerity. What do you do?
>This is the bind facing governments in much of the rich world. The average fiscal deficit in the OECD, a club of mostly rich countries, hit 4.6% of GDP last year, up from an average of 2.9% in the four years before the covid-19 pandemic; interest payments on outstanding debt came to 3.3% of GDP, only just below the amount Nato members hope to spend on defence by 2035. The political-science literature offers some comfort—austerity is not usually a barrier to re-election—but also a warning. Research shows a link between spending cuts and populist success. Indeed, in Britain, France and Germany such parties are already ascendant. Call it the deficit-populism doom loop: ministers face both big deficits and voter revolts, and there is little way of satisfying both the bond markets and the barbarians at the gate.
>During the slow recovery from the global financial crisis of 2007-09, many governments delayed fiscal consolidation and borrowed. Today’s macroeconomic backdrop is less conducive to such an approach: debt loads are higher and central banks are tightening policy, rather than engaging in quantitative easing. The Bank of England has been reducing its bond holdings by about £100bn ($135bn) a year, making it harder for the state to find buyers for the £300bn or so of bonds it sells a year. Bondholders are restive. France’s ten-year-bond yield is 3.4%, up from less than 1% a decade ago. Higher inflation and higher interest rates, which become more likely when governments borrow heavily, can also inflict political pain on incumbents, as President Joe Biden discovered.
>Borrowing more is thus unappetising. The fiscal conditions also make the prospect of hard-right governments more worrying. They typically promise higher spending on pensions and family benefits, as well as tax cuts—a dangerous combination in present circumstances. This dynamic means that unpopular spending cuts may be self-defeating: there is no point righting the fiscal ship only to put a free-spending populist in power. Bond markets have already started to fret about hard-right success. When Emmanuel Macron called a snap election in June 2024 the spread between interest rates on the country’s ten-year bonds and those of Germany’s rose from 0.5 percentage points to 0.8 as investors worried about the potential success of the National Rally. An indecisive result left debt costs elevated.
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>You are a finance minister after a decade of meagre economic growth, shocks from a financial crisis, a pandemic and sky-high energy prices. Public debt is worth more than your country’s gross domestic product, interest rates are at their highest in years and merely servicing outstanding debt is taking up an ever-greater share of tax revenue. Inflation is stubborn. America’s profligacy is satisfying much of the world’s appetite for government bonds, meaning your debt must pay more to attract investors. You lie awake worrying about how to make the numbers add up. Your fellow ministers, meanwhile, fret for their careers: populist parties are on the rampage. The economic context calls for fiscal consolidation; the political one warns against austerity. What do you do?
>This is the bind facing governments in much of the rich world. The average fiscal deficit in the OECD, a club of mostly rich countries, hit 4.6% of GDP last year, up from an average of 2.9% in the four years before the covid-19 pandemic; interest payments on outstanding debt came to 3.3% of GDP, only just below the amount Nato members hope to spend on defence by 2035. The political-science literature offers some comfort—austerity is not usually a barrier to re-election—but also a warning. Research shows a link between spending cuts and populist success. Indeed, in Britain, France and Germany such parties are already ascendant. Call it the deficit-populism doom loop: ministers face both big deficits and voter revolts, and there is little way of satisfying both the bond markets and the barbarians at the gate.
>During the slow recovery from the global financial crisis of 2007-09, many governments delayed fiscal consolidation and borrowed. Today’s macroeconomic backdrop is less conducive to such an approach: debt loads are higher and central banks are tightening policy, rather than engaging in quantitative easing. The Bank of England has been reducing its bond holdings by about £100bn ($135bn) a year, making it harder for the state to find buyers for the £300bn or so of bonds it sells a year. Bondholders are restive. France’s ten-year-bond yield is 3.4%, up from less than 1% a decade ago. Higher inflation and higher interest rates, which become more likely when governments borrow heavily, can also inflict political pain on incumbents, as President Joe Biden discovered.
>Borrowing more is thus unappetising. The fiscal conditions also make the prospect of hard-right governments more worrying. They typically promise higher spending on pensions and family benefits, as well as tax cuts—a dangerous combination in present circumstances. This dynamic means that unpopular spending cuts may be self-defeating: there is no point righting the fiscal ship only to put a free-spending populist in power. Bond markets have already started to fret about hard-right success. When Emmanuel Macron called a snap election in June 2024 the spread between interest rates on the country’s ten-year bonds and those of Germany’s rose from 0.5 percentage points to 0.8 as investors worried about the potential success of the National Rally. An indecisive result left debt costs elevated.