“This will leave increasingly little fiscal space for benefits targeted at mitigating poverty, insuring against income shocks, and supporting labour-market reallocation,” the OECD warned.
In many cases, the most pressing issue is the cost of the state pension system: the U.K.’s Office for Budget Responsibility said this month that by the early 2070s, it will be consuming 7.7 percent of GDP, up from 5 percent today (and only 2 percent back in 1950). More broadly, the European Commission’s last effort at quantifying the problem in 2021 said the overall cost of ageing — including pension, health and care costs — will rise from 24 percent of GDP in 2019 to 25.9 percent by 2070.
Army dreamers vs. bond vigilantes
And at the same time as solving that problem, governments also have to finance a huge upgrade to Europe’s rusty armed forces, to deal with the renewed threat from the east. So far, Germany, the U.K. and France have all accepted they will need to shell out handsomely for that, but Spanish Prime Minister Pedro Sanchez has balked at the challenge.
Credit agency KBRA estimates that the new pledge by NATO states to raise defense spending will widen government deficits in the EU by between 1.3-2.8 percent of GDP, depending on how quickly and on what the money is spent.
“I think the market is much more sensitive now to fiscal policy and the fiscal trajectory of sovereign debt and deficits,” said Ken Egan, senior director for sovereign debt at the rating agency.
That’s particularly true of the U.K., where a combination of high inflation and a concentration of debt in the hands of flighty finance industry investors, like hedge funds, has made the country more exposed to jumps in borrowing costs. The yield on the U.K.’s 30-year debt has pushed well above the level seen in 2022, when then-prime minister Liz Truss’s disastrous “mini-budget” roiled markets. That “suggests that investors remain concerned about the inability to reduce deficits and the debt,” said Guillermo Felices, global investment strategist at asset management firm PGIM Fixed Income.