Broadway Intelligence Ltd – Global Investigations & Risk Analysis » The Fiscal Trilemma: Lessons from London and Paris

Public debt is climbing, growth is stalling, and interest rates remain uncomfortably uncertain. Across the developed world, finance ministries and treasuries are discovering that the room for fiscal manoeuvre has narrowed dramatically. What is emerging is not a temporary squeeze but a structural challenge, a global fiscal trilemma that pits three competing imperatives against one another: [1] the need to increase spending on security, climate transition, and social protection; [2] the public’s resistance to higher taxation; [3] and the pressing requirement to reduce debt and deficits to preserve financial stability.

The combination is toxic. Governments can deliver two of these goals, but not all three simultaneously. The problem is not ideological but mathematical. As Rachel Reeves in Britain and Emmanuel Macron in France have each discovered, the political space for balancing this trilemma is perilously small. Yet the alternative risks a repeat of the crises that scarred the global economy four decades ago.

The Return of Fiscal Politics

The world today bears a faint echo of the early 1980s, when inflation, high borrowing costs, and fiscal stress dominated economic policymaking. But today's context is more complex. Demographic aging, climate transition, digital transformation, and persistent inequality all demand sustained public investment. Meanwhile, populist politics have eroded the consensus for fiscal discipline that emerged after the crises of the 1970s.

In the advanced economies, fiscal activism returned with a vengeance during the pandemic, as governments deployed unprecedented spending to protect households and firms. That response saved livelihoods and prevented a global depression but at a steep price. Public debt ratios surged to levels unseen outside wartime. As inflation revived and monetary tightening followed, debt-service costs climbed, leaving governments caught between new spending demands and higher financing costs.

The arithmetic is unforgiving. Every additional pound or euro of borrowing now carries a heavier interest burden. Meanwhile, electorates weary of austerity resist both spending cuts and tax rises. The trilemma — spend more, tax less, and borrow less — cannot be solved arithmetically. It can only be managed politically.

A New Age of Keynesian Anxiety

The fiscal trilemma is not new. It reflects a century-long oscillation between Keynesian and monetarist paradigms. When the International Monetary Fund was founded in 1944, its intellectual DNA was Keynesian: economies were seen as inherently unstable, requiring active fiscal management to sustain demand and employment. That orthodoxy collapsed in the 1970s, when inflation — not unemployment — became the dominant fear.

By the early 1980s, monetary policy had displaced fiscal activism as the primary tool of macroeconomic stabilization. Independent central banks, beginning with the Reserve Bank of New Zealand in 1989, enshrined price stability as their core mandate. Fiscal policy was demoted to a supporting role: smoothing the cycle via "automatic stabilizers" such as welfare payments and unemployment benefits.

That orthodoxy survived until the global financial crisis of 2008, when central banks discovered that interest rates could not fall below zero indefinitely. With monetary policy constrained, fiscal stimulus returned to the stage. Yet the years that followed brought an uneasy combination: anaemic growth, ultra-low rates, and mounting political impatience with inequality. The pandemic completed the cycle: Keynesianism returned by necessity rather than choice.

The Post-Pandemic Squeeze

The aftermath of COVID-19 left governments facing both a new fiscal reality and heightened public expectations. The crisis had proved that the state could act decisively; citizens began to expect it would do so again — on climate, health, and inequality. Yet the fiscal headroom that enabled the pandemic response had vanished.

Across the OECD, debt ratios now exceed 100 percent of GDP on average. Servicing that debt consumes resources once available for investment. Meanwhile, long-term structural needs, from energy transition to defence, and state pensions, are rising inexorably. The fiscal trilemma thus acquires new urgency: how can governments sustain necessary investment without jeopardizing debt sustainability or overburdening taxpayers?

Rachel Reeves' first months as Chancellor illustrate this dilemma vividly. Her promise of "iron discipline" on public finances coexists uneasily with commitments to revive Britain's stagnant infrastructure, boost productivity, and restore trust in government financial competence after the debacle of the Johnson-Truss years under the Tories. Reeves cannot raise taxes aggressively without alienating middle-income voters already facing record household costs. Nor can she borrow freely without spooking the bond markets. What remains is a delicate balancing act: targeted public investment financed through efficiency gains, reformed planning rules, and the long game of restoring growth.

Emmanuel Macron faces a similar equation from the other side of the Channel. France’s welfare state and military commitments leave little fiscal slack. Yet the Élysée is under pressure to fund the energy transition, bolster defence in the wake of Russia’s invasion of Ukraine, and address domestic discontent over living costs. Macron’s government has attempted to push through pension reform and modest tax adjustments, but each effort triggers fierce resistance. France’s debt has surpassed 110 percent of GDP, and Brussels is pressing for consolidation. Macron, like Reeves, confronts the trilemma’s hard arithmetic: reforming without retrenching, investing without inflating.

Why the Trilemma Matters

At its core, the fiscal trilemma reflects three simple constraints:

The spending imperative: Modern states are being asked to do more — not less. Defence, decarbonization, healthcare, and social protection are all expanding responsibilities.
The tax constraint: Public tolerance for higher taxation has eroded, particularly in societies where real incomes have stagnated.
The debt ceiling: Rising interest rates have revived concerns about fiscal sustainability and financial stability.

Each constraint interacts with the others. Increase spending without raising taxes, and debt explodes. Raise taxes without improving efficiency, and growth suffers. Cut spending indiscriminately, and social cohesion erodes. Hence, the trilemma: policymakers cannot maximize all three goals simultaneously.

The challenge is therefore not purely economic but institutional and political. Fiscal choices are expressions of national priorities and social contracts. Successful navigation requires credibility, transparency, and public consent — commodities often in short supply.

Learning from History

History offers both warnings and guidance. In the late 1970s and early 1980s, many emerging-market economies succumbed to debt crises as higher US interest rates and weak growth rendered their obligations unsustainable. The ensuing "lost decade" in Latin America underscored the perils of excessive borrowing and short-term populism.

In contrast, the fiscal consolidations of the 1990s demonstrated that debt can be reduced gradually without crushing growth, provided adjustment is credible and well-designed. Fiscal rules, medium-term expenditure frameworks, and independent budget offices all helped anchor expectations. The lesson is not austerity for its own sake but disciplined pragmatism: fiscal sustainability must be restored patiently, not through shock therapy.

Four Principles for Managing the Trilemma

While each country must find its own path, four broad principles emerge from experience.

1. Prioritize and improve spending quality

Governments must be ruthless about allocating scarce resources. Not all spending is equal: public investment in infrastructure, education, and green transition yields long-term dividends, while poorly targeted subsidies or prestige projects do not. Fiscal discipline begins with better spending, not necessarily less spending. Reeves’s attempt to redirect UK investment toward productivity-enhancing projects — such as upgrading energy grids and transport — reflects this principle. So too does Macron’s insistence that France’s climate transition be "investissement productif", not simply redistribution.

2. Build fair and elastic tax systems

Sound finances depend on a tax base that is both broad and fair. The goal is not simply to raise revenue but to do so in a way that supports growth and equity. This means closing loopholes, tackling evasion, and modernizing tax administration. For developing economies, it means expanding tax capacity; for advanced ones, rethinking outdated exemptions and aligning tax policy with digital and green transitions. International coordination, on corporate taxation and carbon pricing, is essential to prevent a race to the bottom.

3. Strengthen fiscal institutions and public trust

The politics of taxation and spending cannot be separated from the institutions that sustain credibility. Fiscal rules, independent oversight bodies, and transparent reporting all help anchor expectations and restrain short-termism. Yet these mechanisms must be accompanied by clear communication. Voters will accept higher taxes or restrained spending only if they believe government acts with fairness and purpose. Both Reeves and Macron have grasped this intuitively: legitimacy is the currency of fiscal consolidation.

4. Adjust gradually, but persistently

History shows that sustainable debt reduction is usually gradual. Abrupt cuts can derail growth and deepen inequality. A steady, well-calibrated adjustment combining efficiency reforms, moderate revenue increases, and growth-oriented investment, is more effective. The IMF's research confirms that countries maintaining small, consistent primary surpluses tend to succeed in stabilizing debt without crisis. Fiscal policy, when designed prudently, can be structural policy: shaping long-term growth rather than merely patching cyclical gaps.

The Global Dimension

The trilemma is not confined to advanced economies. For emerging and low-income countries, the stakes are even higher. Many face rising debt-service costs denominated in foreign currency, narrowing fiscal space for essential development spending. Climate adaptation, health, and education all require sustained investment — yet access to affordable finance is limited.

International cooperation therefore becomes part of the solution. The IMF, World Bank, and multilateral development banks can support credible fiscal reforms through concessional finance, but the global tax and financial architecture must also evolve. A coordinated minimum corporate tax and an internationally consistent carbon price floor would help mobilize resources more equitably. Without such reforms, fiscal pressures will entrench global inequality.

Political Economy and Public Consent

No fiscal adjustment can succeed without political buy-in. The trilemma's hardest constraint is not economic but democratic. It boils down to this: voters expect governments to deliver prosperity without pain. Populists exploit this expectation, promising simultaneous tax cuts and spending increases, often financed by implausible projections. The result, as history shows, is eventual retrenchment under duress.

For centrist leaders such as Reeves and Macron, the challenge is to craft a narrative of disciplined renewal — to persuade electorates that fiscal prudence and social justice are compatible. That means reframing fiscal sustainability not as an abstract virtue but as a condition for sovereignty: the ability to invest in the future without being hostage to markets.

Toward a Pragmatic Synthesis

The fiscal trilemma cannot be abolished, but it can be managed. Its resolution lies less in theory than in execution. That is, in prioritization, institutional design, and public persuasion. Economies that navigate the trilemma successfully will be those that reconcile responsibility with ambition. Maintaining fiscal anchors while investing intelligently in growth and resilience.

Reeves' Britain and Macron’s France embody this struggle in real time. Both face electorates weary of austerity yet wary of debt. Both seek to modernize their economies while preserving social cohesion. Neither can square the trilemma perfectly — but both demonstrate that progress is possible through pragmatic discipline and political honesty.

The Test of Fiscal Statesmanship

The great fiscal challenges of our age cannot be met through denial or improvisation. They demand statesmanship. Fiscal prudence is not austerity, just as public investment is not profligacy. The task for today’s policymakers is to design fiscal frameworks that enable choice within constraint. That requires transparent institutions, credible medium-term plans, and a willingness to engage citizens as partners rather than spectators.

If the past eight decades of economic history teach anything, it is that fiscal paradigms evolve. The Keynesian revolution, the monetarist counterrevolution, and the post-crisis synthesis all reflected shifts in political economy as much as in theory. The next phase will demand a new equilibrium, one that restores trust in public finances while addressing existential global challenges.

The fiscal trilemma can be test rather than a trap. Governments that confront it with honesty and creativity will find that constraint can sharpen rather than stifle ambition. The alternative — deferral, denial, or populist expedience — results only in the continuing crisis of democratic politics we see in London, Paris, and elsewhere. The task is to govern within limits, to spend with purpose, and to tax with fairness. The arithmetic of the trilemma may be immutable, but its resolution lies in political will and public acceptance. Those two things remain in very short supply.

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The Fiscal Trilemma: Lessons from London and Paris