Assessing fiscal risks in advanced economies

A common perception is that the huge budget deficits around the time of the pandemic have left government debt as a share of GDP much higher than it was in 2019. This is true for a collection of economies, which includes the US, France, and the UK. But many other economies’ debt ratios are up only slightly or are broadly unchanged. And there’s a group, including Portugal, Greece, and Ireland, where debt ratios are now much lower than in 2019.

What you will learn in this report:

• Despite entering an era of higher deficits and interest rates, we remain sanguine on the risks of fiscal crises in advanced economies. However, this relies on governments setting out and sticking to plans that maintain fiscal credibility.
• Despite the rise in bond yields over the past few years, the average interest rate paid on all debt (r) has risen only gently and this has coincided with a stronger path for nominal GDP growth (g). For most economies, we expect g to exceed r over the remainder of this decade, which should, other things equal, reduce debt-to-GDP ratios.
• For some governments, however, pressure from markets to set out clearer or more ambitious fiscal plans may build, posing a downside risk to growth in the latter years of this decade.