Governments and public sector institutions worldwide are set to face a highly complex risk environment in 2025, driven by fiscal pressures, geopolitical instability, climate change, and technological challenges.
According to Catherine Friday, EY global government and infrastructure industry leader, tackling these challenges will require bold decisions, collaborative leadership, and innovative approaches to risk management.
“Taking an integrated approach to risk management allows governments to better anticipate challenges, respond swiftly and adapt to changing circumstances,” Friday said. “A more anticipatory stance can also create opportunities to improve services and decisions, bringing further tangible benefits for constituents.”
One of the most pressing risks identified in EY’s analysis is the difficulty in achieving sustainable public finances. Global public debt, exacerbated by years of economic shocks, is projected by the International Monetary Fund (IMF) to reach 115% of GDP by 2026.
Friday explained that rising interest rates are increasing borrowing costs, threatening investment in critical public infrastructure.
“To avoid a full-blown fiscal crisis, governments must start making difficult decisions now,” she said. “By refocusing on indicators that determine the long-term value of public money based on the outcomes achieved, they can better prioritize investments and allocate resources. They can also make a better case for any necessary cuts to public spending.”
Economic growth, while a universal policy goal, also poses challenges. The report highlights that global growth figures often mask significant inequalities, with wealth concentrated in higher income brackets.
Factors such as tariffs, ageing populations, and climate-related cost pressures are further constraining growth prospects.
“Governments can use their limited resources to drive this kind of sustainable growth and incentivize sustainable consumption. Exploring measures of economic health other than GDP can also give a more holistic view of the realities people face,” Friday said.
Labour market shortages and informal employment are another critical issue. More than half of the global workforce operates in the informal economy, according to the International Labour Organization.
Combined with growing skills shortages, this trend is threatening tax bases and creating supply chain vulnerabilities.
“Governments can shape this increasingly fluid labour market by investing more in drivers of economic development and growth, such as education. They can also galvanize the private sector to invest in formalizing work and upskilling employees, and regularly review how they measure labour market health,” Friday said.
Digital capacity and cybersecurity represent significant risks for public sector institutions, particularly as artificial intelligence (AI) and quantum computing technologies continue to mature. Ageing infrastructure and siloed systems make organisations more vulnerable to cyberattacks.
“Challenges around skills shortages and data sharing are also preventing many organizations from using digital technologies to improve how they serve constituents,” Friday said. “Upskilling employees to work with technology will unlock benefits, while improving interoperability and standardizing data governance, ethics and security controls will enable better use of data.”
Geopolitical shifts further complicate the landscape. With the world becoming increasingly multipolar, international politics are more fragmented, and cross-border tensions are rising. This environment necessitates strategic diplomacy and collaboration.
“In this volatile environment, diplomacy becomes crucial,” Friday said. “Where politics impede high-level dialogue, strong working-level relationships across agencies and borders will be key to de-escalating tension. At the organizational level, investing in data and predictive analytics will equip governments to better anticipate and prepare for disruption.”
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