FXT Financial Focus (Asia-Pacific 09/15)Rising Global Debt Strains Government Budgets

The global high-debt environment is entering a more difficult phase. Government interest payments across OECD countries exceeded $2 trillion in 2025, accounting for more than 3% of GDP. In economies including the UK, France and the US, interest costs have already surpassed defense spending, with more than a dozen of the OECDs 38 members facing a similar situation. As more fiscal revenue is diverted toward debt servicing, governments have less room for public services, infrastructure and other policy priorities.

OECD countries are expected to borrow around $18 trillion this year, another record, while US government debt reached $40 trillion last month. IMF data show that global public debt has risen to roughly 94% of world GDP, more than 10 percentage points above pre-pandemic levels, and could approach 100% by the end of the decade. The bigger challenge is refinancing, as low-cost bonds issued during the low-rate era are gradually being replaced with more expensive debt.

Average 10-year government bond yields across the G7 have climbed to around 4%, the highest level since 2008. Rising energy prices, inflation risks linked to geopolitical tensions, and growing government and corporate borrowing needs are pushing investors to demand higher returns. Even if fiscal deficits stop widening significantly, prolonged high interest rates could keep lifting government debt-servicing costs as existing debt is refinanced.

The UK spends around £110 billion a year on debt interest, exceeding the budgets of several major government departments. France is struggling to balance fiscal consolidation with political constraints, while rising borrowing costs have become another major challenge. The US faces similar difficulties, as a more divided Congress after the midterm elections could intensify disputes over taxes, welfare and government spending, making deficit reduction harder.

Higher interest payments widen fiscal gaps and force governments to borrow more, while rising debt can lead investors to demand even higher yields. Breaking this cycle generally requires tax increases, spending cuts, stronger economic growth or lower interest rates. However, tax hikes and spending reductions carry significant political costs, while productivity improvements take time and cannot quickly resolve immediate fiscal pressures.

History shows that high debt levels can be reduced. UK government debt reached around 250% of GDP after World War II before gradually declining through long-term fiscal discipline and economic growth. Canada also improved its fiscal position through spending cuts in the 1990s. If borrowing costs remain elevated, more governments may have to restructure their budgets, putting infrastructure, welfare and other discretionary spending under pressure while households and businesses could face higher taxes. Simultaneous fiscal tightening across major economies could also weigh on global demand and investment.

From FXT‘s perspective, the focus of the global debt problem is shifting from the size of debt to governments’ ability to service it. As large amounts of low-interest debt mature, refinancing at higher rates could continue pushing up interest expenses and reducing fiscal capacity to respond to economic downturns or unexpected shocks. A widespread sovereign debt crisis may not emerge in the near term, but fiscal pressure will intensify if economic growth persistently fails to keep pace with rising debt and interest costs. Over the coming years, controlling deficits, improving productivity and strengthening debt structures will be crucial to preventing further fiscal risks.