Overview
The world is in debt. Global public debt reached a nominal value of $111 trillion in 2025, up from $49 trillion in 2010. Including private borrowing, total debt reached roughly $365 trillion in the first half of 2026, more than three times annual global GDP. The cost of carrying these obligations is shaping what governments can afford.
Many governments face growing spending commitments without the political consensus needed to stabilize their debt burdens. Borrowing allows governments to postpone difficult choices, but rising interest costs and weaker growth narrow their options. What governments protect and what they sacrifice will affect public services, investment and their ability to respond to the next downturn, while potentially risking domestic stability. For businesses, investors’ doubts about a government’s finances can raise borrowing costs through higher bond yields, while pressure to rein in public spending could reduce government subsidies.
Borrow Now, Decide Later
Borrowing is expanding across many of the world’s largest economies. The IMF expects advanced-economy deficits to average 5.2% of GDP in 2026, the widest since 2021. For the world’s two largest economies, October forecasts put US general-government gross debt at 126.8% of GDP this year, up from 124.4% in 2025, and China’s at 104.4%, up from 98.6%.
Closing that gap requires agreement about who should bear the cost. Raising taxes asks households and businesses to surrender more of their income, while cutting spending asks someone to accept less of a benefit, service or protection they have come to expect. Each group has reasons to believe the burden should fall elsewhere.
So long as financing remains available on acceptable terms, leaders can protect current commitments and postpone decisions to their successors. The longer the postponement, the more the problem accrues. As interest absorbs a larger share of revenue, governments must settle the same disputes with fewer resources available.
Promises Under Pressure
Existing commitments are becoming harder to contain as populations age. Across the OECD, the number of people aged 65 and over per 100 adults is projected to rise from 33 in 2025 to 52 by 2050, increasing pressure on pension and healthcare financing. As populations age, pay-as-you-go pension systems must support more retirees relative to the workers financing their benefits, while healthcare systems face growing demand from the same aging population.
Those pressures make spending promises harder to keep. The US Social Security trustees now project that the Old-Age and Survivors Insurance Trust Fund will exhaust its reserves in late 2032, after which continuing income would cover just 78% of scheduled benefits. Younger workers may be asked to contribute more while doubting they will receive equally generous benefits in retirement, and current pensioners will feel that their years of contributions entitle them to the benefits they were promised. Asking either group to accept less than the previous generation received is politically unfeasible.
New security commitments are adding to these domestic responsibilities. The wars in Ukraine and the Middle East have increased the urgency of defense spending around the globe. Germany’s draft budget proposes a 32% defense spending increase in 2027, while the Trump administration requests a 40% boost. Industrial competition, particularly between the US and China, creates further demands on public finances and corporate investment by putting political pressure to subsidize critical industries. When a government sees a technology or supply chain as essential to national power, it may be reluctant to withdraw subsidies while a rival continues supporting its own firms. Cutting either defense or industrial support can therefore conflict with national security objectives.
Raising more revenue is complicated by competition between nations for investment. Higher taxes can encourage avoidance, profit shifting and, in some cases, the relocation of businesses, assets or wealthy individuals to lower-tax jurisdictions. Governments are offering concessions to compete even while their budgets remain under pressure: Germany is reducing its corporate tax rate, while American corporate income tax receipts are declining.
The Cost of Buying Time
While those disputes remain unresolved, governments must keep financing the debt they have already accumulated. The OECD’s March report forecasts about $18 trillion in central-government market borrowing among its members in 2026, with net-new borrowing accounting for roughly $4 trillion. Refinancing accounted for nearly 80% of their borrowing in 2025.
That cost reaches budgets gradually. A government that issued a fixed-rate bond when interest rates were low generally keeps paying the original rate until it matures and it must refinance at a higher rate, which raises the interest bill even if the amount owed stays the same. As a result, the budget can remain exposed to higher costs after market rates have begun falling from their peaks. In the US, the Congressional Budget Office’s preliminary fiscal 2026 estimates put the net interest on public debt at $1.14 trillion, higher than the defense budget and up 11% in a year.
For developing countries, the trade-offs can be especially stark. They paid an estimated $995 billion in net interest on public debt in 2025, while the median interest-to-revenue ratio nearly doubled from 2010 to 2025. In 2023, 3.7 billion people lived in developing countries where interest payments exceeded government spending on either health or education.
The terms of government financing also depend on who is buying the debt. Across the United States, the euro area and Japan, domestic central banks’ share of government bonds fell from 30% in 2021 to 20% in 2025. Governments now depend more on private investors whose purchases respond to yields and market conditions, making financing more sensitive to changes in confidence.
Governments’ efforts to contain borrowing costs can create risks of their own. In 2025, the share of sovereign debt issuance with maturities longer than ten years fell to its lowest level since 2009. Borrowing for shorter periods can reduce the immediate interest bill, but it brings the next refinancing date closer, exposing budgets sooner to any further rise in rates or deterioration in investor confidence.
The Gallic Rooster in the Debt Mine
France previews the debt dilemma for the rest of the world. Public debt reached €3.596 trillion, or 119% of GDP, at the end of June 2026, and the government expects a deficit of 5.4% of GDP this year. Annual interest payments are projected to hit €91.2 billion, or about 2.9% of GDP, in 2027. An IMF growth forecast of 0.7%, an aging labor force and productivity below pre-COVID levels make stabilizing France’s debt challenging. As a result, investors are charging France more to borrow. By October 20, its ten-year government bond yield stood at 4.96%, near a 24-year high and roughly 1.53 percentage points above Germany’s.
This has created a politically fragile environment. Since the 2024 snap elections, French President Emmanuel Macron has shuffled through three Prime Ministers. Prime Minister Sébastien Lecornu survived only by reversing Macron’s retirement age increase in a bargain to the Socialist Party last year, demonstrating the political difficulty of reducing debt.
Macron’s austerity policies are unpopular: his approval rating sits at 15%, potentially boosting Marine Le Pen of the populist-right National Rally (RN) and Jean-Luc Mélenchon of the populist-left France Unbowed in the April 2027 presidential race. Le Pen has suggested savings can be found by curbing immigration and EU budget contributions. Mélenchon advocates canceling French debt held by the central bank. These proposals may frighten markets, creating a feedback loop in which bond yields increase.
Teachers and healthcare workers joined strikes over planned budget cuts in September, and students have blockaded schools in protest of anticipated education spending cuts. Cost-of-living demonstrations have turned violent, leading to thousands of arrests and hundreds of injured police officers and firefighters.
The Creditor Cometh
Markets are demanding higher returns to compensate for the increased risk of a further delay in action, increasing the cost of debt. US, German, British and Japanese yields are topping 20- or 30-year highs. The pressure is extending further into Asian markets: In September, foreign investors made the largest combined monthly withdrawal from India, Indonesia, Malaysia, South Korea and Thailand since March 2020.
If government borrowing is reduced, it can weaken the growth that helps make debt manageable. Government purchases and investment contribute directly to GDP, while benefits support household consumption; spending cuts and tax increases can therefore reduce demand. The UK’s Office for Budget Responsibility estimates that tax increases or spending cuts worth 1% of GDP would initially lower economic output by 0.33%–1% relative to projections, depending on the measures used.
Public-sector debt can reach businesses through their banks. A September IMF study estimated Chinese banks’ direct exposure to local-government financing vehicles through loans and other credit assets at 36% of GDP, with much held by locally incorporated banks. Restructurings that impose losses on these lenders could weaken their balance sheets and reduce credit available to other businesses, transmitting public-sector financial strain into private investment.
Higher financing costs can also weaken private investment. Business borrowing rates typically reflect a benchmark rate plus compensation for the borrower’s own risk, so higher sovereign yields can make an otherwise attractive project uneconomic. Companies already face a substantial refinancing challenge: at the end of 2025, half of the outstanding investment-grade debt issued by nonfinancial companies carried interest rates above 4%. Meanwhile, 65% of their investment-grade bond debt due to mature in 2026–28 carried rates of 4% or less, leaving issuers exposed to higher costs when they refinance.
The era of using cheap borrowing to postpone difficult choices is over. Governments will face growing pressure to narrow the gap between their spending commitments and the revenues that support them, and the consequences will extend well beyond the budget. Cuts to benefits and public services can erode living standards, while higher taxes and reduced investment can weaken economic growth. The struggle over who bears those costs can fuel social unrest and destabilize governments, making the necessary compromises even harder to reach. The longer governments delay, the greater the risk that rising borrowing costs force a more abrupt and painful financial and societal adjustment. Governments will likely need to ask current generations to receive less and give more than the previous generation had to, a shift that will not be accepted without dissent.
