In this analysis, we examine the structural fiscal challenge now confronting the G7 economies. Governments face three competing imperatives: honoring existing social entitlement commitments to ageing populations, meeting NATO’s new 5% of GDP defense target, and maintaining sovereign debt sustainability in a higher-rate environment. The arithmetic suggests that these objectives cannot be achieved simultaneously without meaningful trade-offs.
Six of seven G7 nations now sit at or above 100% gross debt-to-GDP, with Germany the only clear outlier. At the same time, demographic pressures are locked in. Age-related spending is projected to rise materially across most advanced economies, particularly in the United States and Japan. Layered on top of this baseline is the step-change in defense spending agreed at the 2025 NATO Summit, requiring many European members to nearly double core defense budgets over the coming decade.
When combined, ageing-related expenditures, higher defense commitments, and rising debt service costs imply an incremental fiscal burden of roughly 3 to 5 percentage points of GDP for most G7 members, and more for the United States. Revenue increases alone are unlikely to close the gap. The adjustment is therefore likely to occur through a mix of entitlement reform, incremental taxation, financial repression, and structurally elevated inflation.
For institutional investors, the implications are significant. Sovereign bond portfolios face rising supply and term premia risk, while real assets and inflation-linked strategies may benefit in an environment characterized by fiscal dominance and persistent structural pressure.
The fiscal trilemma is not a distant risk. It is the operating backdrop for the coming decade.