Advanced economies are running bigger deficits and directing cash toward defence rearmament, industrial subsidies and expanded social programmes, even as public debt stays near historic highs. The result isn’t a blanket return to a 20th century welfare state, but a selective, strategic activism that treats spending as insurance against geopolitical shocks and supply chain breakdowns.

Austerity, all but dead

After 2008, “balanced budgets” became a political virtue. Governments cut, privatized and preached discipline. That narrative persisted through the eurozone crisis and shaped policy debates for years. But the compounding shocks of the 2020s — a global pandemic, Russia’s invasion of Ukraine, rising geopolitical rivalry with China, and persistent supply chain fragility — have altered voters’ expectations and political incentives. In Europe and among NATO allies, resilience and deterrence now outrank fiscal purism.

The change is visible in the numbers and the commitments. NATO members set an ambitious collective target to spend 5% of GDP on defence by 2035, and defence outlays among European allies plus Canada jumped nearly 20% in 2025 versus 2024. These are not temporary headline adjustments. They reflect a reordering of policy priorities where strategic spending is treated as essential for the state rather than discretionary choice.

High debt can coexist with growth — sometimes

The core economic question is simple: can high public debt coexist with sustained growth? The short answer is yes, but only when borrowing finances investments that boost long run productive capacity. The IMF has warned that elevated public debt and weakening institutional credibility raise vulnerabilities, but it also recognizes that debt used for energy security, infrastructure resilience, or technological upgrading is different from debt funding recurrent consumption.

Markets and rating agencies increasingly look beyond headline debt ratios to the composition of spending. Borrowing that expands defence, upgrades ports, or rebuilds domestic semiconductor capacity can plausibly raise potential output and thus help service debt over time. Conversely, persistent deficits that fail to lift productivity or that create long term entitlements without revenue backstops risk higher borrowing costs and fiscal strain down the road.

A selective big state era

This is not a wholesale revival of mid century state intervention. Instead, we are seeing a targeted big state that intervenes where political leaders perceive existential vulnerabilities and yet has retained austerity in those areas judged not worthy of extra investment. Without a doubt, three pillars define the era:

  • Defence: Rearmament is a direct response to increased geopolitical risk and alliance commitments.
  • Industrial policy: Subsidies and “strategic” procurement aim to onshore critical supply chains and nurture technology champions.
  • Social buffers: Targeted welfare measures and labour support soften political resistance to structural change and make transitions more manageable.

OECD data shows that industrial subsidies in key sectors are at their highest relative levels since the 2008–09 crisis, signalling that governments are more willing to shape markets rather than simply regulate them. That shift is political as much as economic: voters tolerate intervention when it is framed as national security or resilience.

Three risks to watch

The turn toward intervention brings real benefits, but it carries three distinct risks.

The first is fiscal drift. Emergency or strategic spending tends to outlast the emergency, and defence procurement, permanent subsidy programmes and expanded social transfers can become politically entrenched, shrinking fiscal flexibility for future shocks.

The second risk is misallocation. Subsidies risk protecting inefficient firms and inflating returns to political connection rather than innovation. Poorly designed industrial policy can distort competition, reduce productivity, and create long tail fiscal commitments.

The final risk is inflation and monetary constraints. Large fiscal expansions, especially if paired with demand support, can sustain inflationary pressures and limit central banks’ room to manoeuvre. That dynamic complicates macro management: more aggressive fiscal activism may force tighter monetary settings, undermining growth.

What comes next

Fiscal conservatism in the post 2008 sense has not disappeared, it has simply been re-ranked. The contemporary political economy prizes security, resilience and strategic industrial capacity above strict budget balancing. That may be a pragmatic response to a more volatile world, but pragmatism is not a guarantee of success.

If new spending raises productivity and strengthens deterrence without crowding out private investment, the era of the big state could prove a sensible recalibration. If, instead, the shift yields persistent deficits, resource misallocation and higher debt servicing costs, today’s interventionism could set the stage for harder fiscal choices later and ultimately could bring about another wave of austerity like that of 2008.

Countries, in particular European countries, therefore, face a narrow path: use fiscal firepower selectively, design subsidies and procurement to reward performance and innovation, and pair new commitments with credible medium term plans for fiscal sustainability. For voters and investors, the relevant question is not only whether governments will spend, but whether they will spend well.