The “Triumph Of Big Government” Created The Current Sovereign Debt Crisis

Authored by Daniel Lacalle,

A few years ago, The Economist published an issue called “The Triumph of Big Government,” highlighting the rise of government intervention as the main driver of economic recovery and growth. The years of budget and deficit control were over. Mainstream economists hailed the decisive action of governments in developed nations, committed to spending to boost growth and abandoning the old “austerity” principles.

Only a few years later, The Economist publishes an issue titled “The Coming Debt Emergency,” mentioning the enormous deficit and debt problems in France, the United Kingdom, Japan, and the United States.

What happened? How can long-term bond yields rise when central banks are cutting rates? How did government debt lose its place as a reserve asset? Easy. Developed economies’ governments of all colours, from Biden and Sunak to Macron and Ishiba, bought the MMT fallacy that “deficits do not matter” and “sovereign nations can issue all the debt they need without risk.” Virtually all international bodies hailed statism as the global solution. However, in 2022, global central banks and investors started abandoning sovereign debt as a reserve asset and decided to add gold.

Developed nations have surpassed the three limits of indebtedness: the economic, fiscal and inflationary limitations. When more public debt creates lower economic and productivity growth, the economic limit has been surpassed. When interest expenses and deficits continue to rise despite rate cuts and higher taxes, the fiscal limit collapses. Additionally, when governments become addicted to issuing more debt in any part of the cycle, with diminishing investor demand, inflation becomes persistent.

No one really believes developed nations’ governments will control their public finances, and constant tax hikes and excessive regulation have choked the productive economy.

Employment is showing the negative effect of the “triumph of big government”. Bloating government spending may disguise GDP but does not create jobs.

Even as government spending continues to artificially elevate headline GDP figures, global labour markets are showing weakness. According to S&P Global’s October 2025 PMI Bulletin, the global economy continues to show headline growth, but employment growth has stalled, and productivity improvement has declined sharply.

S&P Global’s global composite PMI stood at 52.4 in September, its lowest level in three months. Companies are attempting to manage high taxation and regulatory burdens, resulting in stagnant employment levels and output growth. Employment was broadly flat across both manufacturing and services sectors, a sign of declining confidence and cost-saving across advanced economies.

The eurozone is a key example of how big government destroys employment growth, real wage improvements and investment. The modest improvement in activity comes with a decline of hiring and investment. The United Kingdom’s tax hikes and net zero policies have decimated the industry and obliterated employment growth.

These evident deteriorating employment trends come in a period of artificial GDP growth. Government spending is now one of the leading factors in “economic growth” in France, the UK, Germany, Japan and other major economies. Excluding the government spending increase, most of these economies are in recession. S&P Global’s October 2025 Global Economic Outlook signals that output growth is increasingly supported by governments’ fiscal irresponsibility rather than private sector dynamism. The report states, diplomatically, that “looser fiscal stances in the US and Germany are growth-supportive” but warns that the “fragility of sovereign debt markets in many of the world’s largest economies remains a key source of risk.” State-driven “investment” programmes in the eurozone and the UK have partially offset weak private demand. An enormous trail of debt remains, leading to further tax increases.

Government spending and persistent inflation bloat nominal growth, while real economic productivity and private labour opportunities deteriorate. The erosion of value-added generated by the productive economy is alarming. Considering that major governments are borrowing heavily to fund what they call stimulus measures, and they refuse to reduce current spending, GDP figures are being inflated by debt-financed public sector demand.

This labour market stagnation highlighted by S&P Global coincides with a significant slowdown in real wage growth. Although headline CPI has eased in most advanced economies, real inflationary pressures are elevated and continue to erode disposable income even using official CPI figures. This situation leads to weak real consumption and worsening demographic trends.

Big government means low growth, high taxes, weak real wages, and a persistent productivity drag. Malinvestment and excessive government intervention are now the norm in major economies. SP Global explains that “the most interest rate–sensitive sectors, such as manufacturing and construction, account for a smaller share of economic activity in advanced economies than in the past.” However, the problem is not just interest rates but rising taxes and insurmountable regulations that dampen activity in high multiplier sectors.

The 2030 agenda, along with the so-called green regulations and net zero policies, has resulted in capital misallocation and distortions in policy. Thus, productivity gains are increasingly limited to digital and financial sectors.

Fiscal expansion now drives most of the headline economic activity in developed nations with negative side effects everywhere. The debt service burden is crowding out productive expenditure, high taxes limit investment and hiring, and regulation makes the economy stagnant. As sovereign yields climb, countries like France and the UK are already facing “vicious cycles” of slower growth and higher financing costs.

The reader may think that this is the result of incompetence and malinvestment, and if governments spent wisely and invested in productive activities, all would be fine. No. Central planning never works, even if there are some allegedly beneficial intentions. Keynesianism and social democracy always fail. Why are governments not worried? Because they can raise your taxes and present themselves as the solution.

The solution is simple. Less government means more growth.