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Election years bring out the big guns, and politicians and governments unveil big economic policies to secure votes. While these policies may be politically advantageous, they often blow out the budget and add to global debt and instability.
Election cycles promote short-term policies that frequently conflict with long-term economic sustainability. Politicians wanting to win votes, tend to prioritize immediate economic relief, or growth stimulus, over sound fiscal management. Tax cuts lead to increased public spending, and subsidies are commonly featured in election manifestos, often without consideration for the fiscal consequences.
For example, during the 2024 U.S. presidential election, Donald Trump pledged to keep the extensive tax cuts from his first term and to introduce additional cuts for high-income earners. In contrast, Joe Biden proposed targeted spending on childcare and healthcare financed by taxing corporations and wealthy individuals.
While both are ideologically different, their fiscal impact contributes to public debt when revenue projections are inaccurate or spending surpasses initial estimates.
Similarly, European countries facing electoral pressure, such as the UK and France, have announced economic promises that are either unfunded or underfunded. The backlash against France’s pension reform has compelled the government to implement costly concessions, while Britain’s post-Brexit economic challenges have resulted in politically motivated fiscal interventions.
Globally, public debt has never been higher at over $300 trillion as of 2024. Much of this debt was accumulated during the pandemic era when governments implemented substantial fiscal stimulus packages to sustain their economies during lockdowns. Additionally, election-year fiscal largesse exacerbates the issue, further increasing debt-to-GDP ratios.
In advanced economies, the sustainability of rising debt depends on the cost of borrowing. Central banks are attempting to combat inflation by raising interest rates, which makes debt servicing more expensive. For instance, U.S. federal debt exceeds $34 trillion, with interest payments constituting a significant portion of the federal budget.
In Europe, the issue is even more pronounced in countries with already fragile economies, such as Italy and Greece.
Emerging markets face an even greater challenge. Many of these countries borrow in foreign currencies, making them vulnerable to exchange rate fluctuations and global monetary tightening. Increased spending during election years exacerbates these vulnerabilities and can lead to sovereign defaults, as seen in Sri Lanka in 2022 and feared in Pakistan in 2024.
Election-driven fiscal policies often exacerbate inflationary pressures. Tax cuts boost disposable income, while increased public spending elevates demand, leading to rising prices. When these measures coincide with existing supply-side constraints- such as energy crises or global supply chain disruptions-the risk of sustained inflation intensifies.
The International Monetary Fund (IMF) has cautioned against fiscal expansion in inflationary environments. It states that many advanced economies have not yet recovered from the inflation surge of 2022-2023, which was driven by pandemic-era spending and Russia’s invasion of Ukraine. In these circumstances, election-year spending can undermine central banks’ efforts to stabilize prices and may necessitate prolonged monetary tightening.
Moreover, global debt increases the interconnectedness of the financial system. For instance, a debt crisis in a major economy can spread to the rest of the world through contagion. The 2008 global financial crisis demonstrated how vulnerabilities in one sector or region can have far-reaching effects. Today, we see similar risks with highly indebted countries like Italy, which could destabilize the Eurozone, or the United States, where a deadlock over the debt ceiling can disrupt global markets.
Election-driven fiscal policies are a double-edged sword, providing short-term political gains while often exacerbating economic vulnerabilities. As global debt reaches record levels and inflationary pressures persist, the stakes for fiscal discipline have never been higher. Governments must walk the tightrope between satisfying voter demands and stabilizing the economy. If they fail to achieve this balance, they risk undermining not only their own economies but also the global financial system.
Image: round gold-colored coin lot pile, Kim Leary on Unsplash, 2018 // CC0
Clear analysis of a worrying trend