Sustainability of public finances in OECD countries

3. Restoring fiscal sustainability: The “dual pressure challenge”

Looking ahead, government efforts for restoring fiscal sustainability looks challenging because declining potential growth and expenditure rigidities have ratcheted up baseline public spending, thereby contributing to persistently high debt levels. At the same time, governments face unprecedented new pressures due to population ageing, climate, and geopolitical risks. Furthermore, voter expectations for government action are high.

The likely result, without any action of governments, seems to be a persistent upward drift in the debt trajectory, even in the absence of major new shocks. Against this backdrop, the design and implementation of fiscal consolidation strategies becomes more complex than in previous debt reduction episodes.

A government needing to reduce its debt levels while simultaneously increasing spending on strategic priorities must identify sectoral spending cuts or revenue measures that balance both the deficit reduction target and the new spending requirements. This creates a challenge of dual pressures – where the scale of required adjustment at sectoral level significantly exceeds the aggregate fiscal objective.

3.1. Pressures on fiscal sustainability

3.1.1. Gross Government Debt

Figure 1 showed how debt-to-GDP has been on an upward trend in the OECD since 2007. Figure 2 below zooms in to this further by looking at pre-GFC (2007), pre-COVID (2019) and post-COVID (2024 or 2023 if 2024 is unavailable) figures for OECD countries. Most countries (28 out of 35 included in the figure) had a higher debt-to-GDP ratio in 2024 versus 2007, and in most cases, it was considerably higher. On aggregate, debt-to-GDP has risen by almost 40 percentage points since 2007.

Figure 2 also shows that for many countries (16 out of 35 included), debt-to-GDP in 2024 is higher than before the pandemic. There have been difficulties post-pandemic to get debt levels down as well, with debt-to-GDP rising from 82% to 84% for the OECD on aggregate between 2023 to 2024, and with further growth to 85% in 2025 projected (OECD, 2025[28]).

Figure 2. Gross debt of general government (2007, 2019 and 2024)

% of GDP

Note: Debt is obtained as the sum of the following liability categories for the general government sector: currency and deposits; debt securities; loans; and other liabilities (e.g. insurance, pension and standardised guarantee schemes). Data for Türkiye and Colombia is unavailable. For Iceland, Israel, Japan, Korea, Mexico, New Zealand and OECD, 2024 data is unavailable, and 2023 data is used instead.

Source: OECD Data Explorer • Public finance main indicators - government at a glance, yearly updates

Relatedly, in most OECD countries, the net-borrowing-to-GDP ratio remains higher than pre-COVID levels, with only 6 of the 38 OECD countries having lower levels in 2024 compared to the 2015-2019 average (OECD, 2025[28]).

High debt reduces governments’ ability to respond to economic downturns and crises, creates a direct immediate cost in terms of debt interest spending, and may reduce investor confidence in the market for the bonds for these countries (OECD, 2024[29]), risking sovereign distress or default in the worst scenarios.

3.1.2. Declining potential growth

The growth in potential GDP – defined as the level of output that an economy can produce at a constant inflation rate – across OECD countries is projected to fall in the medium-term, given demographic challenges (Jones, 2022[30]; OECD, 2025[31]) and falling productivity (Andrews, Égert and de la Maisonneuve, 2024[32]).

However, there is a growing body of research suggesting that artificial intelligence (AI) will have a potentially significant positive impact on productivity and growth more generally. See for example Trammell and Korinek (2023[33]) and Lu (2021[34]). The extent to which this will offset the negative impacts of demographic challenges and falling productivity in other areas remains an open question, however.

The OECD Employment Outlook 2025 found that without a significant acceleration of productivity growth, GDP per capita growth would slow by about 40% in the OECD area from 2024-2060, compared to the 2006-2019 period (OECD, 2025[31]).

These challenges surrounding potential growth put significant pressures on fiscal sustainability (Guillemette and Turner, 2021[35]). Firstly, lower growth means governments have less scope to “grow themselves out of debt”, a process whereby the debt-to-GDP ratio falls due to a denominator effect. Secondly, government revenues-to-GDP may fall with lower potential GDP, if this is driven by the falling employment-to-population ratio that is expected in OECD member states.

3.1.3. Expenditure rigidity

The rigidity of government spending patterns compounds these pressures. Research analysing COFOG (government expenditure by function) distribution data reveals little reallocation of government spending across programmes in many OECD countries (Barnes, Cournède and Pascal, 2023[3]).

A major obstacle to reallocation arises due to governments’ reluctance to avoid nominal cuts in certain spending areas, like health, social transfers, and social services (Barnes, Cournède and Pascal, 2023[3]). This means that not only do spending levels remain high across the board due to some conjunctural and structural factors, but governments’ ability to reallocate resources toward emerging priorities remains considerably constrained. Therefore, although politically sensitive, spending in these areas – often approved by rolling legislation outside the main budget process – should not be excluded from fiscal consolidation efforts.

For example, evidence from the United States of America shows that mandatory spending – composed of budget outlays controlled by laws other than appropriations acts, including federal spending on entitlement programs – is the largest component of the federal budget (Congressional Research Service, 2023[36]). Legislation surrounding mandatory spending makes this a more rigid form of government expenditure. Mandatory outlays have risen from below 5% in 1962 to above 15% in 2023, and is made up of social security, Medicare, other health and others (Congressional Research Service, 2023[36]). Projections show that mandatory spending will likely increase in the 2030s, and that if current policies remain unchanged, the US will face major fiscal imbalances (Congressional Research Service, 2023[36]).

In Switzerland, les dépenses liées (tied expenditure, similar to mandatory expenditure) has increased by 10 percentage points in the last 10 years, and it is expected it will soon account for 65% of the federal budget (Commission des finances Conseil national, 2021[37]). This is said to be reducing the budgetary room-to-manoeuvre on non-tied expenditure (Commission des finances Conseil national, 2021[37]).

More generally, high shares of rigid components of public spending, when defined simply as parts of the budget that are naturally inflexible (sum of public wages, pensions and debt service), contribute to countries getting into fiscal distress and act as a constraint for fiscal consolidation (Muñoz and Olaberria, 2019[38]). The effect of expenditure rigidity is shown to be potentially more relevant for countries with high inequality, and governments with lower margins of majority (Muñoz and Olaberria, 2019[38]).

Thus, expenditure rigidity adds to fiscal sustainability pressures as it reduces governments’ ability to reallocate existing expenditure to new priority areas – instead, new expenditure needs to be taken on and additional funding needs to be found. Expenditure rigidity is particularly prevalent in spending considered “mandatory” or “statutory” – like health and social transfers. As the large growth in these type of expenditures in the US and Swiss examples highlight, efforts to reign in this type of expenditure are key for fiscal consolidation efforts to have larger and more lasting impacts. Ignoring “mandatory” expenditure in consolidation efforts will lead to necessarily limited improvements to fiscal sustainability.

3.2. Pressures on government spending

3.2.1. Crisis upon crisis

As the pandemic ended, a new crisis was emerging: price inflation in the OECD reached levels not seen since the late 1980s (see Figure 3 below). This was driven by, inter alia, Russia’s war of aggression against Ukraine, supply-demand imbalances and policy support during the pandemic (OECD, 2022[39]).

In response, OECD governments provided support to households in the form of price measures (e.g. capping energy prices) and income measures (e.g. cash transfers to households) (Hemmerlé et al., 2023[10]). Although the level of exposure to inflationary pressures differed across OECD countries – particularly with respect to exposure to energy price difficulties – the median gross fiscal cost of support measures was large, amounting to 0.7% of GDP in 2022 and 0.8% in 2023 (Hemmerlé et al., 2023[10]).

Figure 3. OECD average consumer price index growth rate, year-on-year (1985-2024)

Note: Annual growth in consumer price index (year-on-year). No seasonal or calendar adjustment. COICOP Classification, all items of consumer price index included. Prior to 1995 Chile, Czechia, Estonia, Hungary, Israel, Poland, Slovak Republic, Slovenia, Latvia, Lithuania, Colombia and Costa Rica excluded.

Source: OECD Data Explorer • Consumer price indices (CPIs, HICPs), COICOP 1999

Therefore, moves to improve public finances post-COVID were delayed by the emergence of a new crisis that many governments in the OECD responded to strongly – just as the pandemic was ending, governments faced new and immediate spending pressures, given the inflationary crisis.

This led to the perception that governments were now facing “crisis upon crisis”, in a more shock-prone world (IMF, 2022[40]). After three major economic crises, there is an argument that there has been a broader normalisation of fiscal (and monetary) support (Parikh, 2025[41]). With populations expecting support during these crisis episodes (see Section ‎3.2.3 below), and given the possibility of further crises in the future, this has put additional pressures on government spending.

3.2.2. Existing and longer-term spending pressures

As is widely noted, population ageing will put public finances under unprecedented levels of stress in the years to come. It will demand increased expenditure on pensions, health and long-term care (Rouzet et al., 2019[42]). Taking into account these projected increased expenditures, together with the downward pressure ageing places on revenues, it has been found that tax revenue would have to increase by between 4.5 to 11.5 percentage points of GDP by 2060 to keep debt at current levels in G20 countries (Rouzet et al., 2019[42]).

In the European Union, spending on public pensions alone is projected to rise from 12.1% in 2019 to 13.4% of GDP in 2040 (Bodnár and Nerlich, 2022[43]). Indicative long-run debt simulations for the euro area show that, compared to simulations abstracting from population ageing and without policy changes and reform, the impact of age-related spending on the government debt-to-GDP ratio would be over 50 percentage points by 2070 (Bodnár and Nerlich, 2022[43]).

Growing geopolitical risks are giving rise to another emerging spending pressure, in the form of defence spending. A large increase in defence spending has recently occurred in Central and Eastern European countries, with new spending targets agreed on by members of NATO that will see significant increases in defence spending for many OECD countries (Conigrave, 2025[44]).

Furthermore, most OECD countries have also stated their intention to move towards a carbon-neutral or lower carbon society in the coming decades. This will have considerable costs in terms of emissions abatement costs and the energy transition, particularly for countries which rely heavily on fossil fuels. Climate spending required to achieve 2050 targets varies across countries and is the subject of substantial uncertainty, but may amount, for European countries, to about 1% of GDP (Eble et al., 2025[45]). This may be partly abated if the private sector takes on some of these costs. Moreover, there is a possibility to make better use of existing capital investments and to reallocate from existing capital works, thereby reducing the costs of the transition. Further, climate infrastructure projects costs can be spread out over a number of years or even decades, and need not be incurred all at once. On the revenue side, the energy transition may have a substantial effect on public revenues, for example, by reducing income from taxes on fuel.

3.2.3. Voter expectations regarding fiscal policy

A further barrier to sustainable public finances is the public’s expectations of governments’ fiscal policy. While citizens in a number of OECD countries have been found to broadly support consolidation in principle, this backing collapses once fiscal trade-offs are made explicit (Bremer and Burgisser, 2023[46]). Revenue-based consolidations are especially unpopular, but expenditure cuts are also contested. Public debt itself is a low priority for most citizens, who are reluctant to accept general tax increases. However, research has shown that in a number of OECD member states, there is support for a more progressive tax system to finance additional spending (Bremer and Burgisser, 2023[46]).

Although when primed with discussion of the need for fiscal consolidation survey respondents seem to prefer expenditure cuts, other survey evidence points at a widely held desire for more government spending in general. For example, an OECD survey in 2024 found that, on average, seven in ten say their government should do more to ensure their economic security (OECD, 2025[47]). This result holds across high-, middle-, and low-income groups, as well as across different age groups (OECD, 2025[47]).

Citizens are also expecting governments to help them navigate future challenges, such as those arising from ageing, geopolitical risk and digitalisation (OECD, 2025[47]). However, the 2023 OECD Trust Survey showed that only 37% of respondents believed their government balances the interests of current and future generations fairly (OECD, 2024[48]).

On the political supply side, there is evidence that political parties have responded to these voter demands in their fiscal discourse. Cao, Dabla-Norris and Di Gregorio (2024[49]) find that fiscal discourse has become increasingly favourable to higher government spending in both advanced and emerging economies and across the political spectrum since the 1990s – although they argue that parties have played an “active role in crafting the fiscal narratives over which they compete”. They ultimately argue that the trend increase in expansion discourse across political parties could lead to rising fiscal pressures over time (Cao, Dabla-Norris and Di Gregorio, 2024[49]).

3.3. The dual pressure challenge

In this context, governments in the post-COVID period are facing dual demands – a need to get public finances under control whilst meeting immediate and emerging spending priorities. This is what this paper terms the “dual pressure challenge” – governments need to consolidate the public finances while concurrently responding to spending and revenue pressures, amplifying the challenges facing governments. This, in turn, requires governments to pursue two complementary actions as part of their fiscal consolidation efforts: identifying substantial savings while simultaneously increasing budget flexibility, to create the fiscal space needed for the pressure areas.

The interdependence of these two elements is crucial. Without efforts to enhance budget flexibility and enable reallocations, traditional fiscal consolidation measures risk being offset by the very rigidities they fail to address – i.e. governments may achieve temporary savings only to see fiscal pressures re-emerge through entrenched expenditure patterns and declining revenue. These two objectives must therefore go hand in hand and should be considered integral components of any post-COVID fiscal consolidation strategy.

Recognising the need for this dual objective raises fundamental questions about how fiscal consolidation approaches should adapt to contemporary challenges. Traditional fiscal consolidation strategies prove inadequate for addressing both the scale of required aggregate (i.e. after resources have been allocated to the spending areas requiring immediate and substantial inputs) fiscal adjustment, and the structural spending rigidities that characterise modern public finances.

Modest improvements in the fiscal situation of OECD countries post COVID-19 can therefore be understood through the framework of the dual-pressure challenge. Governments are not focused solely on fiscal consolidation, which in previous cases has tended to allow for quicker recoveries to key public finance indicators. Governments are now also having to deal with pressures on the revenue and expenditure sides concurrently – helping to explain the more subdued recovery to key public finance indicators post COVID-19.