What will it take to stabilise public debt in advanced countries?
Public debt levels in Europe and other advanced countries have come down since the pandemic but remain near historic highs. At the same time, 2024 deficits were very high in most of the larger advanced countries, exceeding four percent of GDP in eight European Union countries, the United Kingdom and the United States. The IMF projects EU median public debt to rise over the medium term, albeit slowly. What is the fiscal effort that is required to stabilise debt, and is it feasible?
We answer this question in a deep dive published this week. There is good news and bad.
The good news is that debt-stabilising primary balances – the excess of revenues over non-interest spending that is needed to start pushing down the debt ratio – are generally within historical precedent. The bad news is that the deficit cuts required to reach debt-stabilising primary balances are very high in several countries. France, the US, the UK, Slovakia, Poland and Romania will need to increase their primary fiscal balances by around five percentage points of GDP, and sometimes more, over the medium term.
Such adjustment efforts are historically rare. In addition, cutting overall spending is exceptionally hard in the present environment. Spending pressures are on the rise, driven by population ageing and defence. Many governments fear the political backlash. Raising taxes is difficult in countries in which tax ratios are already high and may slow growth.
Most EU countries and the UK understand the challenge and have pledged to address it – including by publishing medium-term fiscal-structural plans that are by and large consistent with debt stabilisation. But undertaking the needed adjustment will likely require a more protracted fiscal effort than most countries are hoping for. In the meantime, countries with large adjustment needs could be vulnerable to shifts in market sentiment.
The Why Axis is a weekly newsletter distributed by Bruegel, bringing you the latest research on European economic policy.
Authors
Jeromin Zettelmeyer
Bruegel Director
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