Elections, spending, & inflation

Government debt has surged over the past few years as governments around the world have responded to the pandemic and the energy crisis, with unprecedented spending.  There has been a reset of expectations about the role of the state in buffering firms and households from shocks. 

The IMF estimate that many advanced economies spent >10% of GDP on various pandemic support measures; New Zealand, for example, spent a remarkable 19% of GDP, which partly explains its robust economic performance through Covid – and its sticky inflation now.  And Bruegel report that European governments have committed ~€760 billion over the past two years on various energy support measures: Germany alone spent 7.4% of GDP (€265 billion).

And there are multiple emerging pressures on government spending and investment: much increased debt servicing costs as rates spike higher; increased military spending (last week, Sweden’s government announced an almost 30% increase in defence spending next year to achieve the 2% of GDP target); industrial policy (hundreds of billions of dollars are being spent in the US and EU to attract investment and economic activity); and the net zero transition. 

Budget deficits have increased sharply, leading to higher debt levels.  Government debt is projected to increase over the next few decades, as increased spending commitments due to a changing strategic environment intersect with underlying fiscal sustainability issues.

This is seen across many advanced economies, notably in Europe and the US.  China’s government spending, both at central and provincial levels, is also increasing – with calls for more spending to support an exit from what partly looks like a balance sheet recession.

Not every economy is in this position; several small advanced economies continue to operate in a relatively disciplined manner.  Ireland and Greece, for example, with recent memories of fiscal trauma, are committed to reducing government debt.  But across many larger advanced economies, government willingness to increase spending is clear.

Politics matters

This will be reinforced by an event-heavy calendar of elections.  Beyond elections next month that I am watching closely for personal reasons (New Zealand and the Netherlands), 2024 has a series of highly consequential elections.  To name just a few, European Parliamentary elections are in June; the US Presidential election is in November; and the UK general election will likely be held in late 2024 (it has to be held by January 2025).  Other notable elections will be held in India, Indonesia, Taiwan, and Mexico.  Combined, this represents ~40% of global population and ~60% of global GDP. 

The full note is available at: https://davidskilling.substack.com/p/elections-spending-and-inflation