Italy has just presented its draft budget for 2025. This action is a significant first step toward realizing the full primary balance it will eventually require to begin stabilizing its runaway public debt. The Italian government has recognized that to ensure long-term fiscal health, it must generate primary budget surpluses consistently over several years. This requirement is a direct response to the need to deal with the nation’s $31 trillion public debt that has recently become unsustainable.
In the last few years, Italy has focused on delivering primary surpluses. This strategy would address the concerning trend of an increasing debt-to-GDP ratio. As proof that strategic coordination is a key component of its long-term fiscal strategy, the government intends to continue these efforts through 2027 and beyond. Italy has plenty of economic challenges, but it hopes to begin reducing its debt-to-GDP ratio by 2026, at least on paper. This rosy forecast occurs despite the fact that the burden of interest is still rising.
The fiscal picture is not an anomaly for Italy. The United States will face a parallel reality as we near the start of the new decade. The consensus among professional forecasters is for inflation to increase this year and next. Though this unexpected infusion will soften the projected growth in debt-to-GDP, it won’t erase it. Similar to Italy, the U.S. will have no choice but to face its fiscal red ink and soaring interest payments over the next few years.
The United Kingdom and especially France will soon experience the same pressures that hit Italy first. All of these challenges are likely to overlap before this decade is over. Neither country has an unlimited ability to push new fiscal burdens down the road. They deal with the weight of high public debt, coupled with increasing interest payments, which require substantive action to put their debt-to-GDP ratios on a stable path.
In France, the increasing interest burden is one of the greatest threats to its long-held reputation for fiscal rectitude. Analysts indicate that the country will no longer benefit from moderate debt servicing conditions due to escalating interest rates and a high fiscal deficit. This difficult scenario will require a much broader fiscal consolidation undertaking just to prevent the expected increase in its public debt-to-GDP ratio from expanding further.
France has some fiscal room to grow its military budget without increasing its high levels of public debt. Indeed, at current trends, France is barreling towards an unprecedented budgetary crisis. Similar to their cohorts in the United States and the United Kingdom, exploding fiscal deficits and swelling interest payments are placing the country on a precarious precipice.
The United Kingdom is under a lot of pressure to return its overall government budget to surplus. Restoring fiscal surpluses is important for stopping the dangerous upward march of the public debt-to-GDP ratio. The bottom line The nation’s fiscal health mostly depends on growth, especially the right kind of growth that makes inflation manageable. Without bold action the UK will find it hard to get a grip on its growing public debt.
Take for example major developed countries such as Italy, United States, France, and the United Kingdom which are all at major fiscal risk. To address these challenges, they need to collaborate to bring their debts under control. It is the delicate dance between increasing interest burdens and increasing public spending that will determine how well these countries can juggle their debts.