Financial consequences of past decisions are now becoming apparent

In the world of economics, the topic of fiscal policy is a hot button issue, with many countries grappling with rising debt and deficits. This article takes a closer look at the current state of fiscal policy in major advanced economies, China, and some notable regions.

The US, for instance, continues to struggle with fiscal responsibility despite both Democrats and Republicans paying lip service to the concept. The outlook for US fiscal policy will be examined on October 16 by OMFIF, a global think tank. One proposal that stirred controversy was the Mar-a-Lago Accord, a plan put forward by Stephen Miran, former chair of the US Council of Economic Advisers. The Accord suggested terming out some foreign-held US debt into 100-year zero coupon bonds or imposing user fees, a move that was seen as akin to a US default and flew in the face of US capital market openness.

Across the Atlantic, the UK's former prime minister, Liz Truss, faced bond vigilantes who reacted harshly to her fiscal policies. Similarly, President Emmanuel Macron in France faces low growth and difficult fiscal dynamics while trying to implement reforms. Italy maintains its deficits but has a heavy debt stock that leaves little room for maneuver.

China, too, faces challenging fiscal dynamics due to slow potential growth and difficult demographic prospects. The growth trajectory in China is declining due to demographics and an unsustainable incremental capital output ratio. Despite appearances, China's debt levels are also rising, with opaque data not accounting for massive contingent liabilities.

The outlook for potential growth is anemic, with China's slowing, the US's potential growth of 2% not enough to sustain growth, and the claim of the Trump administration that the "big beautiful bill" would push potential growth to 3% being questioned.

Sustained moderately higher inflation could reduce debt-to-GDP ratios, but it could also undermine trust and further destabilize the economy. Fiscal largesse could place unsustainable pressures on medium- and long-term rates, leading central banks to resort to yield curve control or quantitative easing.

Central bank independence in advanced economies could be threatened by fiscal pressures. Citizens are resistant to seeing their benefits shrink, and reality cannot be escaped forever, leading to a potential day of reckoning and increasing populism.

Aggrieved populations feeling the pinch will turn to despair and populism, and the consequences will not be pretty. Political leaders in various countries are focused on squabbling and simplistic, polarizing pictures, rather than making difficult decisions for the good of the economy.

Individuals interested in staying informed on this topic can subscribe to OMFIF's newsletter. Figure 1, from the International Monetary Fund World Economic Outlook, April 2025, shows general government gross debt to GDP ratios.

Key political leaders expected to guide their countries through imminent financial crises are not explicitly listed in the available sources, but notable affected regions include Israel and Palestine due to ongoing conflict pressures, with significant humanitarian and economic strain. The Swiss canton of Aargau faces financial challenges such as rising expenditures and revenue losses requiring strategic budget adjustments for 2026.

Mark Sobel, the US Chair of OMFIF, underscores the importance of making tough decisions for the good of the economy. Chancellor Rachel Reeves in the UK is seeking to adhere to fiscal rules, but finds it difficult due to limited growth. The US Treasury emphasizes 'regular and predictable' issuance, but there is ongoing debate about the optimal strategy for debt management, including the role of short-term issuance.

In conclusion, the global economy is facing challenging fiscal dynamics, with major advanced economies and China grappling with slow potential growth, difficult demographic prospects, and rising debt levels. The consequences of inaction could be dire, with increasing populism and potential financial crises looming. It is crucial for political leaders to make tough decisions for the good of the economy and for citizens to stay informed about these issues.