In the US, the November election has the potential to fundamentally alter the nature of the federal government, its finances and, indeed, American society.

Joe Biden has been a big-spending president. The Inflation Reduction Act ($US370 billion when announced), the CHIPs Act ($US280 billion), $US1.23 trillion of infrastructure spending, the $US100 billion of student debt cancelled and the massive aid packages for Ukraine and Israel have resulted in the deficit increasing to almost twice America’s historical average.

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Donald Trump, who has said he will extend his controversial tax cuts for companies and the wealthy at a cost of roughly $US5 trillion over the next decade, showed in his first term that he’s a profligate president, albeit this included the onset of the pandemic. His 2017 tax cuts have been a major contributor to the blow-outs in America’s debt and deficits.

Under Biden, at least, the splurge of spending has sustained the US economy even as the rest of the world has struggled. Inflation, while still high by historical standards, is cooling, and interest rates will probably start to track down late this year.

Trump, an isolationist and even more of a protectionist than Biden would be if he implemented the policies being drawn up by his conservative advisers, is likely to re-ignite inflation while lowering the economic growth rate. The spectre of stagflation would be abroad.

With two candidates who have shown little interest in fiscal prudence and a Congress bitterly divided along partisan lines, it is – regardless of who wins the elections in November – unlikely that there will be a serious attempt to control government spending, rein in the deficits, and tackle a surging debt burden and the doubling in net interest costs (to more than $US1.7 trillion and 4.1 per cent of GDP) that the CBO projects.

In France, where Emmanuel Macron called a snap election after his party was belted by Marine Le Pen’s Rassemblement National (RN) party in the European Parliament elections earlier this month, Macron’s attempt to shave €25 billion off France’s €154 billion deficit is only a very modest step in the right direction. It wasn’t sufficient to prevent ratings agency Standard & Poor’s cutting France’s credit rating last month.

Le Pen has promised to increase public spending, lower the retirement age and cut the value-added tax on fuel, so it is improbable that an RN victory would produce more conservative public finances.

As in the US, if the far-right party were to emerge as the dominant political force in France, a lot more than the country’s finances would change – indeed, there would be massive implications for the larger Europe and the stability of the EU.

By breaching the EC limits to deficits and debt, France, Italy, Belgium, Hungary, Poland, Slovakia, Malta and Romania could be fined for jeopardising the euro area’s financial stability.

Because of the continuing war in Ukraine and Europe’s expensive responses to climate change, however, there is near-term flexibility built into the EC’s rules.

Both Greece (162 per cent) and Spain (108 per cent) have debt-to-GDP ratios way above the EC’s ceilings, but they weren’t singled out because their budget deficits have been steadily and significantly shrinking.

The EC appears far more concerned about the trajectories within public finances than their absolute levels. If Macron’s party loses government, those concerns (and other, non-financial fears) will mount.

The US and Europe are two of the world’s three major economic regions. The other is China, which is also experiencing some strains in its public finances.

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While its central government’s debt levels are quite low (about 25 per cent of GDP at the end of last year), Beijing raises almost all government revenues while the spending is done at local and regional government levels, where on-balance sheet debt was about 31 per cent of GDP. Local government financing vehicles held debt that amounted to about 48 per cent of GDP.

All up, public debt, according to the International Monetary Fund, is about 116 per cent of GDP.

There is also, of course, a lot of debt within China’s state-owned banks and other state-owned or controlled entities and heavy borrowing by households has pushed the country’s overall debt-to-GDP ratio above 250 per cent, or about twice the level of the US.

China’s credit rating was lowered by Fitch Ratings earlier this year largely because of the outlook for its fiscal deficit, which the ratings agency expects to rise from 5.8 per cent to 7.1 per cent this year, and its impact on public debt ratios.

All three regions – the US, Europe and China – have ageing populations, which flows through to rising social welfare and healthcare costs.

In the US, for instance, Medicare spending as a proportion of GDP is projected to double over the next decade, to 4.2 per cent of GDP. Net interest costs are rising faster than the rate of GDP growth. Those aren’t, without an improbable increase in the economic growth rate, sustainable trends for the US or other economies experiencing fiscal deterioration.

The pandemic blew holes in the finances of governments around the world. Some are doing a better job of restoring their finances than others in an environment made more volatile and difficult by wars, trade wars and relatively low rates of economic growth.

China is in a special category since the authoritarian nature of its government allows Beijing to dictate abrupt changes of direction, but the US will eventually have to respond to the threats posed by the fragility of its public finances, and Europe, if it is to remain cohesive and stable, will need to force and/or encourage its more profligate member countries to rein in their spending.

The success, or failure, of their efforts – if efforts are made – will have significant implications for the rest of the world’s economic and geopolitical stability and longer-term outlook.

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