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GLOBAL SHIFT TOWARDS HIGHER PUBLIC SPENDING

Why in the News?

  • Rising Deficits: IMF data shows budget deficits and public debt increasing across major economies after pandemic and geopolitical shocks.
  • Policy Shift: Governments are moving away from austerity towards higher spending on defence, infrastructure and welfare.
  • Debt Concerns: Global public debt is projected to cross 100% of global GDP by 2029, the highest since 1948.

KEY GLOBAL FISCAL TRENDS

  • Strategic Spending: Governments worldwide are prioritising defence, infrastructure, and social protection, driven by geopolitical tensions and economic resilience needs rather than short-term fiscal restraint.
  • Debt Expansion: Public debt levels, after surging during the pandemic, are again rising as nations accept higher borrowing to fund long-term strategic objectives.
  • Investor Tolerance: Bond markets have so far shown tolerance towards higher deficits, unlike earlier crises, reflecting confidence in large economies’ repayment capacity.
  • Inflation Effect: Moderate inflation has temporarily eased debt burdens by reducing real debt values, even though it strained household purchasing power.
  • End of Austerity: Policymakers now widely accept that strict austerity weakened infrastructure and defence readiness, making it politically and economically unattractive.

COUNTRY-SPECIFIC DEVELOPMENTS

  • United States: Large fiscal deficits persist due to tax cuts and social security spending, with markets confident in U.S. debt sustainability given relatively low tax rates.
  • Germany Exception: Germany’s public debt remains comparatively low, but already high taxation limits scope for further revenue mobilisation without harming growth prospects.
  • Canada Expansion: Canada approved major infrastructure and trade spending, raising deficits to strengthen economic sovereignty amid changing global trade dynamics.
  • Japan Stimulus: Japan announced a sizable fiscal stimulus, targeting cost-of-living relief, investment growth and expanded defence expenditure.
  • Europe’s Shift: Even fiscally conservative parties across Europe now support higher welfare and pension spending, reflecting electoral and social pressures.

FISCAL DEFICITS AND PUBLIC DEBT

●      Fiscal Deficit: A budget deficit occurs when government expenditure exceeds revenue, requiring borrowing to bridge the gap.

●      Public Debt: Public debt represents accumulated government borrowing and is measured relative to GDP to assess sustainability.

●      Debt Sustainability: A country’s ability to service debt without default depends on growth, interest rates, inflation and investor confidence.

●      Austerity vs Stimulus: Austerity policies cut spending to reduce deficits, while fiscal stimulus boosts spending to support growth and stability.

●      Global Oversight: Institutions like the International Monetary Fund monitor fiscal risks and advise countries on debt management strategies.