The Great Balancing Act: Fiscal Responsibility in a Connected World

In an era of soaring debts, geopolitical fragmentation and persistent crises, governments face an unprecedented balancing act. Fiscal responsibility now demands a nuanced approach that reconciles domestic demands, debt sustainability and cross-border interdependence.

The Global Debt Challenge

Global public debt has climbed above $100 trillion, making it on track to exceed 100% of worldwide GDP. Successive shocks—the 2008 financial crisis, the COVID-19 pandemic and the energy upheaval after Russia’s 2022 invasion of Ukraine—have compelled nations to deploy sizable fiscal buffers. As a result, fiscal policy has evolved into a macro stabilizer and political tool, shaping both growth trajectories and market expectations.

Despite fears of de-globalization, globalization remains robust. Roughly 20–25% of world GDP crosses borders in goods and services, and the DHL Global Connectedness Index hovers near record highs at 25%. At the same time, about 80% of economic activity occurs within domestic borders, underscoring that most fiscal decisions remain nationally driven.

Growth, Inflation and the Interest-Rate Environment

Medium-term global growth forecasts point to modest expansion. The IMF projects 3.2% growth in 2025 and 3.1% in 2026, while the World Bank anticipates a slowdown to 2.3% next year with only a tepid subsequent recovery. Inflation is expected to ease from highs above 5% to around 4.2% in 2025 and 3.6% in 2026, though advanced economies like the U.S. may remain above central bank targets.

High interest rates are here to stay. Central banks have cautiously reduced policy rates, but a return to the ultra-low levels seen after 2008 is improbable. Structural drivers—supply-chain realignment, investment needs for green and digital transitions, and aging populations increasing fiscal pressures—suggest a new normal of higher real rates. When interest rates exceed growth rates (r>g), debt dynamics become unforgiving, raising the stakes for primary balances and credible policy frameworks.

Fiscal Policy in a Fragmented Yet Connected World

Global trade rebounded strongly in early 2025, outpacing any period since 2010 aside from the 2020–21 recovery. In the first half of the year, goods trade volumes rose over 4% year-on-year, with Sub-Saharan Africa leading at +9.6% and North America at +7.0%. Among large traders, Ireland saw trade expand by about 30%, Switzerland by 24% and Slovenia by 22%.

• U.S. tariffs matched 1930s levels, yet trade resilience persisted.
• Forecasts for 2025–29 trade growth remain at 2.5% annually.
• Average shipment distances are at an all-time high (4,990 km).

This resilience coexists with rising geopolitical tensions and targeted tariffs. While core trade flows endure, fragmentation risks are real. Financial markets illustrate similar dynamics: open capital accounts discipline excessive deficits through higher spreads, but they also reduce policy space when global yields climb.

Structural Headwinds: Aging, AI and Geopolitics

Three megatrends shape fiscal imperatives. First, demographic aging in advanced economies raises healthcare and pension expenditures, compressing budgets. Second, the digital revolution and AI adoption call for massive public investment in infrastructure, education and regulation to harness productivity gains. Third, geopolitical rivalry—manifested in defence spending, industrial policies and supply-chain diversification—adds layers of fiscal cost and complexity.

Balancing these demands means prioritizing investments that yield high social returns, while creating fiscal buffers during good times. It also requires financial and trade interdependence to lower borrowing costs and attract investment in green and digital transitions.

Countries at the Crossroads: Case Studies

Different regions offer illustrative examples of this balancing act.

The U.S. faces the risk of fiscal dominance, as successive tax cuts widen deficits and push debt further above 100% of GDP. Japan, with the world’s highest debt ratio, relies on credible monetary-fiscal coordination to maintain market confidence. Germany, benefiting from modest debt levels and robust growth, exemplifies disciplined fiscal frameworks that allocate room for both public investment and social safety nets.

Charting the Path Forward: Practical Steps

• Strengthen medium-term budget frameworks to anchor long-term debt reduction plans.
• Enhance transparency and empower independent fiscal councils for public accountability.
• Prioritize spending on green, digital and social infrastructure with high returns.
• Expand revenue bases through progressive taxation, digital levies and efficient collection.
• Support multilateral coordination to lower financing costs and manage cross-border shocks.

By following these steps, policymakers can create credible fiscal anchors that reassure markets and citizens alike. Investing in technology and human capital can lift potential growth, making debt burdens more manageable relative to expanding economies.

Conclusion: Embracing the Balancing Act

Fiscal responsibility in today’s interconnected world is no longer a simple equation of cutting spending or raising taxes. It requires a holistic approach that recognizes shared risks and opportunities across borders. By blending disciplined frameworks with strategic investments and multilateral cooperation, governments can navigate the tightrope between meeting public needs, sustaining growth and preserving fiscal sustainability. In this delicate balancing act, foresight and collaboration are the ultimate guides toward a stable and prosperous future.