Newly elected governments in Europe – especially in France and the United Kingdom – face rising public debt and deficits, creating a challenging environment for their ambitious agendas.
The Wall Street Journal said that the recent elections gave these leaders a difficult term, as voters expect major change amid financial constraints and economic recession.
High debt and deficit
Public debt has reached its highest levels in decades in both France and the United Kingdom, according to the Wall Street Journal.
In France, the national debt stands at 112% of GDP, up from 97% in 2019. The United Kingdom saw a similar increase, with public debt rising to 104% of GDP from 86% in 2019, according to the same source.
These figures are worrying compared to pre-Covid-19 levels, and reflect a broader trend across advanced economies, where budget deficits have increased significantly.
In both countries, government spending and budget deficits as a percentage of GDP remain well above pre-pandemic levels, the Wall Street Journal says.
The International Monetary Fund reported that the budget deficit in major advanced economies rose by 3 percentage points from what it was before the pandemic.
France’s financial challenge
France faces serious financial challenges as the far-right National Rally and the left-wing New Popular Front make big gains. Election results show the National Rally becoming the third-largest bloc in parliament, calling for sweeping tax cuts and the repeal of President Emmanuel Macron’s pension reforms.
On the other hand, the New Popular Front, which won the largest number of seats, proposes freezing prices and significantly increasing the minimum wage, which would require increasing subsidies and salaries, while losing tax revenues.
No party in France has addressed the need to cut the public deficit, estimated at 5% of GDP this year, the newspaper reported. That has led to disciplinary action from the European Union.
Recently, French government bond yields have risen, with Standard & Poor’s downgrading France’s sovereign debt rating to AA- in May.
Economic problems in the United Kingdom
In the United Kingdom, the victorious Labour Party, led by Prime Minister Keir Starmer, has pledged to increase spending on public services, including the National Health Service.
However, the Institute for Fiscal Studies criticises all major parties for avoiding hard fiscal choices in their manifestos.
“Growth is expected to be quite disappointing, and interest rates on debt are expected to remain high,” Isabel Stockton, the institute’s chief economist, told the Wall Street Journal. “This combination looks worse than any other parliament in postwar UK history.”
Public debt in the UK has risen, with the International Monetary Fund announcing that it will exceed 104% of GDP this year.
The newspaper also said that the UK deficit is expected to reach about 6.5% of GDP, equal to Japan as the highest among major industrial economies.
Germany and the United States under the microscope
The newspaper points out that even Germany, known for its financial caution, has turned into a large budget deficit instead of the surpluses it achieved in the first decade of the twenty-first century.
After intense negotiations, Chancellor Olaf Scholz’s coalition announced a budget deal that adheres to strict borrowing rules, while trying to stimulate economic growth and boost military spending.
The United States faces a bleaker picture, the newspaper said, with public debt rising to 123% of GDP from 108% in 2019. Despite this, political leaders have shown little inclination to prioritize debt reduction.
“The US has been getting away with unsustainable fiscal policies longer than anyone else,” Holger Schmieding, chief economist at Berenberg Bank, told the newspaper.
a future vision
The last time public debt was this high was in the period after World War II, when governments reduced it through strong economic growth and cuts in military spending.
Today, with an aging population and rising public spending on health care and pensions, it is unclear where big cuts can be made, according to the Wall Street Journal.
Investor confidence remains a concern, as evidenced by the UK’s experience in 2022 when bond yields rose following sweeping tax cuts and borrowing announcements by then-Prime Minister Liz Truss. Similarly, Italy’s populist government faced a rise in borrowing costs in 2018 due to spending plans.
A study by the Kiel Institute for the World Economy found that populist governments tend to experience economic downturns, with per capita GDP and consumption falling by more than 10% over 15 years, along with rising debt burdens and inflation.
