Fiscal policy in 2025 operates within a challenging context characterized by a myriad of factors. These factors include elevated interest rates, high public debt, as well as conflicting political and economic priorities. As per Kavan Choksi, global public debt is likely to stay at 91% of GDP, thereby fostering an environment where governments experience increasing borrowing expenses and reduced fiscal flexibility. The challenges are further exacerbated by a high-interest rate environment, with debt servicing absorbing the resources that may support growth-oriented investments otherwise. Further complexity to fiscal management is added by populist demands for increased social spending, tax cuts, and subsidies. This is particularly prevalent in politically volatile regions.
Kavan Choksi talks about fiscal policy being a balancing act in 2025
Advanced economies face the difficult task of balancing fiscal consolidation with growing populist demands for increased spending and tax cuts. In the United States, potential extensions of tax relief measures may widen the deficit. These measures include the 2017 Tax Cuts and Jobs Act. However, increasing entitlement costs, interest expenses, as well as defence spending tend to further constrain fiscal options. In a similar manner, the fiscal outlook of Japan is largely overshadowed by an ageing population. This section of the popular continues to drive up health care and pension costs, demanding higher expenditures even with subdued economic growth.
Fiscal policy shall tighten mildly in Europe, even though fiscal positions shall be diverse across nations. France is expected to display the highest deficit within the euro region, with no considerable tightening expected amid political gridlock. This makes France more vulnerable to disruptions in sovereign bond markets. The deficit shall be much lower in Germany. The recent government collapse in the country prevents any major increase in government expenditures over the short term. However, a loose fiscal policy and public investment in infrastructure and the energy transition would be required to lift the economy out of stagnation. Fiscal policy will also remain expansionary in Central and Eastern Europe, particularly Romania and Poland, due to rising military spending and populist pressures.
As per Kavan Choksi, a strong US dollar and high global interest rates shall amplify the cost of dollar-denominated debt, thereby limiting their capacity for fiscal expansion. Due to this, emerging markets are expected to face intensified fiscal pressures in 2025. Such challenges are especially exemplified in Brazil, which has a populist agenda promoting much looser government spending. The country may experience a 15 percentage points (ppt) rise in the debt-to-GDP ratio by the year of 2030. A significant tightening of monetary policy has been additionally prompted by currency depreciation along with fiscal sustainability concerns.
When it comes to Asia, India is likely to sustain growth through moderate public investment. On the other hand, mainland China depends on targeted fiscal measures to counter its structural slowdown. In the GCC or the Gulf Cooperation Council states, governments are diversifying revenues away from oil and stimulating non-oil sector activity with public investment. Navigating fiscal consolidation along with political instability is critical for Sub-Saharan Africa. It also has to focus on increasing demands for infrastructure, energy and climate resilience investments.
Be First to Comment