The U.K.’s budget watchdog has taken full responsibility for the unprecedented early publication of its budget forecast — but warned that it may happen again if its arrangements don’t change. Last week, the Office for Budget Responsibility’s economic and fiscal outlook — which contained detailed information on what would be in the budget — was accidentally made accessible before Chancellor Rachel Reeves delivered her budget in parliament.  In its investigation into what happened, the OBR said the “pressure on the small team involved” to ensure that the fiscal forecast was published immediately after Reeves finished her speech on Nov. 26 led to the use of a “pre-publication facility” which although is “commonly used” creates a “potential vulnerability if not configured properly.” “The twice-yearly task of publishing a large and sensitive document is out of scale with virtually all of the rest of its publication activities,” said the investigation, which was hastily carried out by peer Sarah Hogg and OBR board member and City bigwig Susan Rice. It called for “completely new arrangements” to be put in place for the publication of market-sensitive documents, and urged the Treasury to pay “greater attention” to the need for adequate support when funding the OBR. The watchdog said that given its small size, it used an outside web developer to upload its contents. It found multiple attempts by outside parties to access the document before it was published, by guessing the URL, and also revealed there was a successful attempt to do so in an earlier major March publication. On Nov. 26, the day of the budget, there were 44 unsuccessful requests to the URL between 5.16 and 11.30 a.m. as the document had not yet been uploaded. Between 11.30 and 11.35 a.m., the web developer began uploading documents to the draft area of the OBR’s website, which the watchdog believed was not publicly accessible. At 11.35 a.m., an IP address which had made 32 previous unsuccessful attempts to gain access to the site accessed it for the first time successfully. Six minutes later, at 11.41 a.m., Reuters sent a news alert reporting the government would raise taxes by £26.1 billion by 2029-2030. The URL was then widely accessed by journalists, markets and other parties between 11.30 a.m. and 12.08 p.m., after which it was removed by the OBR. The report also reveals that one IP address successfully accessed the March version of the fiscal outlook, when Reeves delivered her spring statement. The log shows the document being accessed at 12.38 p.m., five minutes after Reeves started speaking and nearly 30 minutes before publication. “It is not known what, if any, action was taken as a result of this access and there is no evidence at this stage of any nefarious activity arising from it,” the report says. The report doesn’t review how financial markets were influenced by the early publication, but says the OBR will cooperate with the Financial Conduct Authority. The investigation described the mistake as the “worst failure” in the 15-year history of the OBR, but said that it was not a case of intentional leakage, or “pressing the publication key too early.”  OBR chief Richard Hughes is due to appear before MPs Dec. 2 where he will be fighting for his future. Speaking to Sky News on Sunday, the chancellor repeatedly declined to say whether Hughes was safe in his job.  Earlier today, Keir Starmer said that while he was “very supportive” of the OBR, the breach of market-sensitive information was a “massive discourtesy” to parliament. 

Cameron Brown is a former special adviser at HM Treasury and is now a senior adviser at Charlesbye Strategy. Anyone who believes Christmas starts earlier each year should spend some time inside the U.K. Treasury. When the country hears the first faint echoes of Mariah Carey drifting through the supermarket PA system in mid-November, retailers call it the “Christmas creep.” Westminster gets something far less jolly: the “budget creep.” The annual moment when rumors fatten, hints mutate, and half the fiscal package appears to be public before the chancellor has typed a single word. I saw this more closely than most. Within a single extraordinary fortnight, I went from serving Liz Truss’ first Chancellor Kwasi Kwarteng to working with his successor Jeremy Hunt, moving from the budget that blew up the bond markets to the one built to calm them. Few advisers get to serve a chancellor who detonates a budget, as well as the one brought in to steady the ship only days later. And there is no better crash course in the life cycle of a budget: the whispers, the over-interpretation, the panic, the denial and the sudden transformation of every think tanker with a spreadsheet into a clairvoyant. Once that ambiguity takes hold, human nature does the rest. We aren’t built to tolerate secrets. Tell people they will hear nothing until a fixed date, and every stray comment starts to glow with imagined significance. A throwaway remark from a minister becomes a coded signal; an economist’s speculative prediction on X becomes an afternoon of fiscal sleuthing. But the problem isn’t journalism or the widespread speculation, it’s a system that asks the country to stare at a locked door for months and then expresses surprise when people try the handle. And when you can see the real-world consequences — from hiring freezes and delayed investment decisions to families cutting back their groceries — watching the country whip itself into a frenzy over phantom tax measures isn’t charming. Inside the Treasury, meanwhile, things look stranger still. Budgets appear to be grand set pieces, but the real action begins six weeks earlier, with the Office for Budget Responsibility’s (OBR) first forecast. Hidden inside is the number everyone fixates on: the sacred “headroom.” In theory, this figure shows what the chancellor can spend without breaching her fiscal rules. In practice, it behaves like musical chairs, constantly shifting until the music stops and everyone solemnly treats the final figure as destiny despite the fact that it is based on projections five years out — as though pandemics, wars and global shocks politely submit advance notice. During one budget under Hunt, for example, the initial OBR forecast suggested we might have extra breathing space. A senior official murmured: “We might be able to do something interesting” — which, in Treasury culture, counts as reckless hedonism. Then, only days later, gilt yields twitched, growth was revised down, and the headroom shrank like a wool sweater in a boil wash. Outside commentators insisted the chancellor had changed strategy, while it was simply the arithmetic tightening its grip. By the time the country reaches peak excitement, however, the budget is pretty much at the printers. Two weeks before the speech, the Treasury must submit its major measures to the OBR, so they can be modeled. And once that happens, the concrete sets. Chancellor Rachel Reeves isn’t hunched over a laptop rearranging tax bands like chess pieces at 3 a.m. the night before. Still, the theater endures. Hence the lasting allure of the so-called “budget rabbit” — a move former Chancellor George Osborne had perfected with a “one more thing, Mr. Speaker” flourish. Kwarteng, on the other hand, attempted the same trick with a cut to Britain’s top tax rate, only to conjure the only rabbit in history that bit the magician and set fire to the stage. This is why pitch-rolling has become so routine and normalized. It is the quiet art of easing people toward an unpopular measure, so that nobody falls off their chair when it appears. Not because the Treasury loves theatrics, but because surprise decisions can jolt markets. Contentious measures are now introduced gently over time, so Bank of England Governor Andrew Bailey doesn’t have to ring the Monetary Policy Committee for an unscheduled catch-up. Much of what looks like leaking is simple deduction. Anyone with a calculator, the Treasury’s publicly available ready reckoners and a feel for the political weather can narrow the options. Rule out the unaffordable, cross out the implausible and what remains points in one or two directions. But silence is no safer. Each year someone proposes the Treasury adopts a genius strategy of saying nothing at all. And while ideal in theory, in practice, this creates a vacuum for paranoia to rush into. Deny one rumor and its opposite becomes gospel; deny nothing and silence becomes a knowing wink and a nudge. Leave a wild claim like “doubling VAT” unchallenged for a day, and you will spend the next week hosing down hysteria from MPs and the public — and rightly so. Treasury officials are right about one thing, though: Some tax ideas should never be aired, even when they’re being actively developed. Certain measures trigger such powerful behavioral responses that the responsible course is to deny them outright. Whisper “stamp duty cuts,” and the housing market freezes. Float a hint about dividend reform, and accountants begin rearranging client affairs before the budget team has even met. And as Reeves is discovering, even the faintest suggestion of a wealth or exit tax sends globally mobile individuals browsing one-way flights to Dubai. This reveals a deeper problem. Our tax system is being contorted to satisfy arbitrary five-year windows built on forecasts nobody can honestly pretend to believe. Chancellors end up ratcheting up the tax burden not because the policy case demands it, but because the spreadsheet does. As long as fiscal policy is chained to these crystal-ball projections for 2029, we will keep making real-world decisions to appease an unknowable future. And yet, as flawed as the current system is, it is still preferable to what came before. Former Labour Prime Minister Gordon Brown’s era of fiscal optimism involved forecasts for an economy that existed only in the minds of ministerial speechwriters, as growth, investment, tax receipts — everything floated serenely and implausibly upward year after year. The OBR was designed to bring sobriety. Having lived through the best and worst of this process, I can say the real problem isn’t the speculation itself but a system built on projections that collapse at the smallest market movements. We keep trying to deliver tax policy inside an artificial window, dictated by a forecast that’s out of date before the ink dries, and then act surprised when ministers reach for ever higher taxes to satisfy a number that was never real in the first place. Until that changes, the ritual will repeat. The numbers will wobble, rumors will swirl and the budget creep will appear early. My advice is simple: Abandon the crystal balls, stop pretending the future can be modeled to the nearest decimal place, and let the chancellor get on with governing before the music stops.

LONDON — Rachel Reeves wanted the world to know her upcoming budget would be a big deal.  The U.K. chancellor took the unusual step last month of flashing a warning signal that she would break a Labour manifesto pledge and hike income tax in a bid to reset Britain’s stagnant economy. At an unusual 8 a.m. press conference in Downing Street, Reeves said she wanted to “put the national interest first” and lend a hand to “chancellors in the future,” while cutting the £2.9 trillion government debt pile — the annual interest on which costs more than £100 billion. It would have marked a historic shift in approach — and the first rise in the U.K.’s basic rate of income tax for five decades. Amid flatlining growth since the 2008 financial crash — and to avoid political fights — British chancellors have long pretended that small tweaks to taxes can keep pace with huge public service demands.  Parts of the state have been starved of funds while ever more cash is shifted towards health and welfare. Gaps have been plugged with borrowing — inching debt higher. Spending on buildings and infrastructure plummeted in the decade after the crash.  The result has been drift. And a sense that nothing in Britain quite works.  “We’ve been running a 21st-century welfare state on a 20th-century tax base,” said David Aikman, director of independent macroeconomic think tank the National Institute of Economic and Social Research.  Britain’s existing model appears to have reached its limit — not least after the double hits of a global pandemic and the war in Ukraine. Covid led to spending spikes on health and welfare support, while Putin’s full-scale invasion saw subsidized household energy bills and a drive to repower Britain’s languishing armed forces.  Borrowing costs now leap at the slightest hint Britain’s delicate fiscal balance could come unstuck. Even footage of Reeves weeping in the House of Commons last summer rattled the markets. The long neglect of Britain’s public realm is showing scars. Prisons are full, courts have record backlogs, and the health service has massive waiting lists despite more funding than ever being poured into the NHS. Local government has lost around half its central grant and cannot keep up with demands on social care and special educational needs. Rows about public sector wages have led to marathon strikes. Britain’s armed forces are underpowered, living in substandard conditions, and struggling to get the right kit. “With an ageing population driving up health and social care costs, new pressures on defense and resilience, and the lingering fiscal hangover from the pandemic, [the current] model is no longer sustainable,” argued Aikman. Covid led to spending spikes on health and welfare support. | Tolga Akmen/EPA Raising one of the big three taxes — income tax, VAT, or national insurance — would reap significant sums, but has long been considered too difficult a fight with voters and opposition parties. So Reeves settled on a compromise: taking 2 percent off national insurance and adding 2 percent to income tax. The variables in their application could reap an immediate £6 billion annual windfall, according to the brains behind the proposal — not an enormous sum but a significant chunk. “She’s making sure the fiscal stance of this government reflects that we’re not in the politics of the 2010s anymore,” said one person familiar with the plans, granted anonymity like others in this piece to discuss internal government thinking. ‘BOTTLED’ But that was before Reeves dramatically changed her mind.  Little more than a week after the chancellor delivered her scene-setting speech in Downing Street, her income tax gambit was ditched. The decision was initially pinned on better-than-expected – albeit seldom-reliable – snapshot economic projections, which suggested that more cash will flow into government coffers after all, negating the need to pull the trigger. Labour MPs sensed spin — and will hardly have been calmed by fresh reports this week that budget watchdogs will, in fact, downgrade Britain’s growth forecasts. They worry Reeves has ducked her big chance for a game-changing budget amid wider disarray at the top of government. Reports soon emerged that, amid acute pressure on his leadership despite a massive House of Commons majority, Prime Minister Keir Starmer had decided that breaching a manifesto promise could be career suicide. Starmer’s Cabinet openly debated the wisdom of taking what one person with knowledge of the discussions described as “unnecessary political risks.” ‘DIFFERENT PATH’ The upshot is that Reeves will now revert to the usual approach — pulling levers on numerous smaller taxes in a bid to give herself more room for maneuver. Those around the chancellor insist her level of ambition is undiminished. “Is this still a government determined to change this country’s fortunes? Yes,” a Treasury aide said. Reeves herself told the Times Magazine in recent days: “We can’t just carry on like this and muddle through. We have to make some decisions to get on a different path.” Aides argue her path has been clear and unwavering throughout the budget preparation process — even as businesses lament a longer-than-usual run-up to the setpiece moment and an extraordinary number of leaks. At the first scoping meeting Reeves held last summer, the chancellor set three priorities: reducing NHS waiting lists, tackling the cost of living, and paying down Britain’s debt. All three will still be addressed in the budget regardless of the specific tax-raising measures, aides claim. People familiar with the plans also insist Reeves will generate enough revenue to keep the U.K.’s public finances stable until at least the end of the current parliament.  Rachel Reeves is now open to the charge she’s ducked the hardest choice — and left the British economy in tinkering mode. | Pool Photo by Andy Rain via EPA That means delivering a far higher fiscal buffer than the £10 billion she gave herself in autumn 2024 and spring 2025. Ministers accept that keeping this so-called “headroom” low only fuels speculation about tax rises, creating an unstable landscape for potential investors. And officials argue their pitch for an economic reset never hinged on the income tax plan — since the £6 billion sum it would have generated is low enough to be found via other means. “It was never going to be a one lever thing,” one official said. “It was always going to be a number of choices.” Either way, Reeves is now open to the charge she’s ducked the hardest choice — and left the British economy in tinkering mode. “Rowing back from the proposal to raise income taxes suggests the government has stepped back from the chance for a proper fiscal reset — the sort of shift needed to put the public finances on a stable footing,” said Aikman.  “In its place, it looks as though we’re getting a pick-and-mix package that leans heavily on better-looking [forecasts.] While that’s politically understandable, it won’t be enough to put debt on a sustainable path — and the likely outcome is that we’ll be in for further fiscal resets this parliament.”

Europe must work to unleash the untapped potential of its internal market, European Central Bank President Christine Lagarde said, noting that she given the very same message in 2019 – before Russia’s war on Ukraine and U.S. President Donald Trump’s disruptive second presidency. Speaking at the annual European Banking Congress in Frankfurt, Lagarde said the ECB estimates that internal barriers in services and goods markets are equivalent to tariffs of around 100 percent and 65 percent, respectively. While acknowledging that barriers cannot be removed entirely, she pointed out to three key steps to boost potential. These include a overhaul of EU governance to see the bloc move to qualified majority voting to avoid legislation being bogged down by individual vetoes. The EU should also introduce a pan-European regime for corporate law, the so-called 28th regime. Finally, it should revive the principle of mutual recognition to allow goods and services to move freely within its Single Market. Lagarde gave political leaders a pat on the back for boosting government spending on defense and infrastructure, and for learning from the experience of past crises. “The fiscal packages now being implemented for defense and infrastructure – especially here in Germany – are coming at the right time for Europe and will have a measurable effect on growth,” she said.

Mujtaba Rahman is the head of Eurasia Group’s Europe practice. He tweets at @Mij_Europe. With less than two weeks to go before the U.K. budget, Chancellor of the Exchequer Rachel Reeves made a spectacular U-turn. As recently as last week, Reeves was preparing the ground for a controversial move to to raise income tax rates by 2 pence and cut national insurance contributions by the same amount — a move that would have breached her party’s 2024 election manifesto. Then, after talks with Prime Minister Keir Starmer in the face of a backlash from cabinet ministers and Labour Party backbenchers, who warned that such a “betrayal of trust” would cost them the next general election, she retreated. Officially, Labour Party sources said the change of strategy was due to a better-than-expected pre-budget forecast from the Office for Budget Responsibility (OBR), which put the gap between planned government spending and Reeves’s fiscal rules at £20 billion. It was a boost that stemmed from a smaller government debt forecast due to gilt market movements during the 10-day window the OBR used for its projection. However, that’s only part of the story. Raw party politics also played a crucial part in this shift. And as the chancellor’s intended budget strategy has unraveled under an unprecedented public spotlight, it has exposed all the chaos at the top of the government. It’s absolutely no coincidence that Reeves’ volte-face happened just as Downing Street launched a clumsy attempt to head off a leadership challenge that was aimed at ousting Starmer after next week’s budget is revealed. A budget that breached the Labour manifesto would have made such a challenge much more likely, as many of the party’s MPs — including scores of “newbies” elected for the first time last year — fear they would lose their seats if it was ditched. And the retreat now means the prime minister will likely be able to avoid an attempted coup. That is, at least until after next May’s elections to the Scottish and Welsh parliaments and local English authorities. Meanwhile, among the options Reeves is now likely considering instead of raising tax rates is cutting income tax thresholds — less politically damaging, as thresholds weren’t covered by the manifesto promise. But even that isn’t so simple: If Reeves raised the £12,570 personal allowance at which the 20 percent basic rate starts, it would be regressive and hit many of the “working people” Labour has vowed to protect. Therefore, a cut in the £50,271 threshold, where the 40 percent rate kicks in, seems more likely. However, even that would hit those considered middle income. It would be less contentious to just lower the threshold for the 45 percent rate, which starts at the £125,140 mark. But cutting any threshold would still be controversial, and likely branded as a “stealth tax” by both Reform UK and the Conservatives. Plus, Reeves is actually expected to prolong the freeze on income tax thresholds and allowances introduced by former Chancellor Rishi Sunak, which is due to end in 2028, as a two-year extension would raise between £8 billion and £10 billion. Another potential downside to the U-turn is that Reeves may now make more enemies among those who stand to lose, resulting in a less certain revenue stream from raising several other taxes in a “bits and pieces” approach rather than a “go big” budget the markets would prefer. There is also a risk that these alternative measures would harm growth in a way that raising income taxes would not. Such measures may include a higher tax on the most expensive properties and a rise in capital gains tax. Meanwhile, plans to impose higher taxes on limited liability partnerships and to bring in an “exit tax” for wealthy individuals who leave Britain now appear to be on the back burner. If Reeves raised the £12,570 personal allowance at which the 20 percent basic rate starts, it would be regressive and hit many of the “working people” Labour has vowed to protect. | Tolga Akmen/EPA And yet, the chancellor doesn’t want to just fill the £20 billion hole, she also wants to increase the slender £9.9 billion headroom against her fiscal rules to at least £15 billion — and possibly to the £20 billion that’s sought by the markets. Then, to top it all off, came the attempt to stifle a potential leadership challenge, as the prime minister made an attempt to deter Health Secretary Wes Streeting from mounting a coup by publicly accusing him of plotting — a move that backfired as, in the words of one insider, Starmer’s allies “overshot the runway” by singling Streeting out. The official line is that Number 10’s briefings to the media were intended to make clear the prime minister would fight any attempt to depose him. But all this has only weakened Starmer and strengthened Streeting, who looked statesmanlike in his response. Overall, some ministers and Labour backbenchers have expressed relief at the abrupt shift on income tax. Though many didn’t disguise their dismay at what has been described as “a shambolic week” for both Starmer and Reeves. Indeed, with all that’s transpired, Reeves’ final package next week may prove to be less politically toxic than expected. But after such a disastrous run-up, her task of restoring order and “selling” a budget is looking much harder.

German business morale unexpectedly declined in September, a key survey showed Wednesday, adding to growing concerns among German business that Chancellor Friedrich Merz’s government will not deliver the economic turnaround it has promised. The Ifo institute said its business climate index fell to 87.7 in September from a revised 88.9 in August. Analysts had expected the index to show modest gains on expectations of a coming massive fiscal stimulus. The survey was published as Merz stood up in Berlin to begin the Bundestag’s first big debate on the 2026 budget. In a speech focused largely on the need to increase spending on defense and security issues, Merz also pointed to first steps in reducing German energy prices and his intention to cut bureaucracy. “There is no time to lose: Our country has to feel now that things are getting better,” Merz said. For businesses, though, this appears to be taking too long. Ifo’s survey suggested that not only were companies less happy with their current business, but that expectations had also darkened noticeably. “The surprisingly sharp decline … dampens hopes for a rapid economic recovery,” Deutsche Bank economist Robin Winkler said in a note to clients. The news follows on the heels of another survey from Tuesday: S&P Global’s Purchasing Manager Index. This showed Germany’s private sector expanding at the fastest pace in more than a year — but cast doubt over the sustainability of this recovery, as new orders dropped in both services and manufacturing. A representative survey commissioned by POLITICO’s sister publication, the German tabloid Bild (also owned by Axel Springer), showed Wednesday that not only businesses are increasingly pessimistic about the country’s economic prospects. Confidence in the Christian Democrats and Socialists’ ability to return the German economy to growth continues to fall. While 43 percent believed this was the case in May, by mid-September that number had fallen to just 28 percent.

The likely collapse of France’s government won’t force it to seek support from the International Monetary Fund, but the country absolutely has to get its public finances under control, European Central Bank President Christine Lagarde warned Monday. “The risks of any euro area government falling is worrying,” Lagarde said in an interview with France’s Radio Classique. “Markets evaluate risks in their totality and we have seen the country risk increase in recent days.” Lagarde said she is very closely monitoring French bond spreads — the premium investors demand for holding French debt rather than German equivalents, which are the benchmark for European bond markets. That spread hit its highest level for the year last week. The French minority government is widely expected be toppled in a confidence vote on Sept. 8, as opposition parties ignore Prime Minister François Bayrou’s appeal to them to support his 2026 budget plans.   Bayrou’s finance minister, Eric Lombard, had warned that a collapse could spark so much turmoil that the IMF would have to intervene, though he quickly backpedalled. Lagarde, who was in charge of the IMF during the bailouts of Greece and other eurozone countries a decade ago, suggested this talk was overdone. She argued that the IMF typically only responds to requests for help from countries that have immediate problems with their balance of payments and which cannot pay their debts. “That isn’t the case with France today,” she said, adding that the IMF “would probably say that the conditions aren’t met” and would instead tell Paris to “get organized … and put your public finances in order.” “It is obviously necessary the direction, as regards terms of debt service and debt volumes, be headed downward and that they come back into the limits of what has been agreed” at a European level, Lagarde stressed. EU rules limit a country’s budget deficit to 3 percent of gross domestic product, but France’s has been well above that level since the pandemic. It is set to stay above 5 percent of GDP this year, while Bayrou is looking for a way to get parliament to approve a budget that would close the gap to 4.6 percent next year. MORE TROUBLES ABROAD Lagarde also expressed concerns over troubles brewing across the Atlantic, where U.S. President Donald Trump has launched an unprecedented attack on the U.S. central bank in an effort to push interest rates down. Trump has attempted to fire Federal Reserve Governor Lisa Cook on the basis of allegations — so far untested in court — that she committed mortgage fraud. Trump has openly boasted that replacing Cook with an appointee of his own would ensure a majority on the Fed’s board willing to do his bidding. Central bankers and independent economists across the world have warned that this could undermine the Fed’s independence from government, which they say has been a cardinal factor in creating prosperity over decades. A lawyer by training, Lagarde said that Trump would find it “very difficult” to take control of the U.S. central bank but warned of dire consequences should he succeed. “If he did manage to do so, I think it would pose a very serious threat to the U.S. economy and the global economy,” she said. “Monetary policy obviously has an impact on the U.S. in terms of maintaining price stability and ensuring optimal employment in the country.” By law, the Fed is required to pursue both low inflation and full employment. Fed Chair Jerome Powell said in a key speech last month that the two goals were currently in tension with each other, but appeared open to cutting rates later this year.

French Prime Minister François Bayrou’s budget bombshell on Tuesday wasn’t just a wake-up call for France.  Rather, it was the clearest and most pressing evidence yet that an aging and increasingly  impotent Europe is heading for bankruptcy unless it embraces major change: digitization, decarbonization and defense all need to be financed, against a backdrop of demographic decline. But it has little or no room for maneuver, due to two more ‘D’s — debt and deficits.   And while Bayrou’s presentation, featuring spending cuts, tax increases and even the scrapping of two public holidays, conveyed the impossibility of carrying on with business as usual, the reactions to it only showed how hard changing course will be. “This government prefers to attack the French people, workers and pensioners, rather than hunt waste,” far-right leader Marine Le Pen said via social media, vowing to bring down Bayrou’s minority government if he sticks to the plans.  France isn’t alone in its predicament. Bayrou is only one of a handful of instinctively centrist prime ministers in the region to find themselves boxed in by the extremes of left and right: only last week, across the Channel, U.K. Prime Minister Keir Starmer was forced by a backbench revolt of his own MPs to abandon welfare cuts he deemed necessary. And while many euro area countries have made progress in closing their budget gaps since the end of the pandemic, the International Monetary Fund expects the bloc’s aggregate budget deficit to widen to 3.3 percent of gross domestic product by the end of the decade, pushing gross public debt up to 93 percent of GDP.  Having escaped the bailout discipline of the euro sovereign debt crisis a decade ago, France’s finances are in a worse state than any other major economy in the region.  Ratings agencies routinely point to its worsening debt trajectory. The deficit reached nearly 9 percent of GDP in 2020 and hasn’t been below the EU’s 3 percent target since 2019. Even under Bayrou’s projections, it won’t get back there until 2029.   And the cost of servicing that debt cannot help but grow in the next couple of years, as governments around Europe refinance at much higher interest rates the money that they borrowed for next to nothing between 2014 and 2022. But other capitals are having to grapple with many of the same pressures that are troubling Paris — especially when it comes to demographics and the fateful decline in the ratio of workers to pensioners: Germany’s central bank estimates that the workforce will start shrinking in absolute terms, just as Chancellor Friedrich Merz’s huge debt-funded spending plans kick in. A report earlier this month by the Organisation for Economic Co-operation and Development (OECD) found that overall social spending linked to demographics will raise public spending by some 3 percentage points of GDP within 25 years.    “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.  Only last week, across the Channel, U.K. Prime Minister Keir Starmer was forced by a backbench revolt of his own MPs to abandon welfare cuts he deemed necessary. | Pool photo by Andy Rain/EPA “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.  DANCING TO A GLOBAL TUNE But investors in U.K. and French bonds have been sensitized to the issues by other, external, factors, at play over which they have no control. In the U.S., President Donald Trump’s “Big Beautiful Bill” which is projected by the Committee for a Responsible Federal Budget to add over $4 trillion to government debt over the next 10 years.  Concerns are also growing about Japan, where rising inflation has forced the central bank to ease up on printing money to buy an endless stream of government bonds. The U.S. is still running a deficit over 6 percent of GDP this year, despite having effectively full employment. It’s spending over $1 trillion a year on interest costs alone, more than it spends on defense. As Trump has spread uncertainty through global markets, investors have demanded an ever-higher premium for holding long-term debt that only offers a fixed return.  As such, even though inflation has edged down and the Federal Reserve has cut interest rates, the key 10-year bond yield has continued to move higher. Blackrock chief executive Larry Fink and his counterpart at JPMorgan Jamie Dimon have both warned recently that the situation is close to getting out of control. The market for U.S. government bonds, or Treasuries, is the largest and most liquid in the world. They are a global benchmark for sovereign debt more generally — and when yields in the U.S. go up, they tend to push borrowing costs across the whole world up with them.  “Certainly when Treasuries sneeze, Europe still reaches for the tissues,” KBRA’s Egan said.  The question is — is it just another cold, or something much more serious this time?

Hungarian Prime Minister Viktor Orbán is reveling in European Commission President Ursula von der Leyen’s political woes ahead of a key confidence vote in the European Parliament. “Time to go,” Orbán wrote Wednesday in a post accompanied by an image of von der Leyen stepping out of a red frame, symbolically indicating her political departure. The post came as the Parliament prepares to vote on Thursday on whether von der Leyen should remain at the helm of the EU executive, reflecting growing tensions around her leadership. The confidence vote stems from frustration at von der Leyen’s undisclosed communications with the CEO of vaccine-maker Pfizer during the pandemic. Speaking in Strasbourg this week, she dismissed the accusations, warning of an “alarming threat from extremist parties trying to polarize societies through disinformation.” In a second post on Wednesday, Orbán framed the vote as a defining moment for Europe. “Tomorrow will be a turbulent day in the European Parliament,” he wrote. “The vote was scheduled due to the corruption scandals piling up around the President, but we all know that corruption is just the tip of the iceberg. This is about competence, results, and the future of Europe,” he added. Orbán’s attack came just a day after the Commission issued country-specific economic recommendations, urging Hungary to adopt “permanent” fiscal measures to address a budget gap. The Hungarian government pushed back, defending its economic strategy. “In contrast to Brussels, for the government the families and pensioners and Hungarian companies come first, not the multinationals,” Hungary’s economy ministry said in a statement Wednesday. Budapest and Brussels have been locked in a broader dispute for years, with the EU freezing billions of euros in funds over rule-of-law concerns. With less than a year until Hungary’s next national election, Orbán has intensified his campaign against the EU — with von der Leyen and the bloc’s support for Ukraine chief among his targets.

BRUSSELS — The European Commission has backed drastic measures announced by the new Romanian government to bring down its borrowing and avoid a blow-up with Brussels. Newly-elected Romanian President Nicușor Dan is pushing a raft of measures including a public-sector pay freeze, an end to energy price caps, and a bumper VAT hike to bring down a deficit that in 2024 hit 9.3 percent of GDP, the widest in the EU. The overspending led the EU executive last year to begin an Excessive Deficit Procedure against Romania, putting it on its list of countries under strict orders to curb their borrowing or else face sanctions. The Council’s approval on Tuesday removes for now the threat of Romania losing financial support from the EU. Following a meeting of EU finance and economy ministers, European Commissioner Valdis Dombrovskis said Bucharest’s measures represented an “important and positive step toward complying with the new excessive deficit recommendation, provided all measures are swiftly legislated and implemented.” The Commission will produce a follow-up assessment by autumn, he added. In a speech given to parliament earlier this week Dan said he wanted to stop Romania’s debt falling to “junk” status, which would make the country essentially uninvestable. The move also marks a shift in the EU’s attitude to Romania after the country came close to electing anti-establishment candidate George Simion in its national election earlier this year. Dan’s proposed package of spending cuts and tax hikes is already proving unpopular, triggering street protests and prompting Simion to call for a no-confidence vote. The last meeting saw European ministers blast the previous Romanian administration for not taking “effective action” to fix the country’s finances. Elsewhere on Tuesday, Romania’s central bank said it expected the package of fiscal measures to push inflation up in the short term but would address some of its underlying causes. In doing so, it said the package would bring down Romania’s financing costs and support the leu’s exchange rate. The Bank had spent an estimated €6 billion in May — nearly 10 percent of its total foreign reserves — in calming what ultimately proved to be a brief crisis of confidence in the local currency.