Rising borrowing costs and record government debt are forcing major economies to divert more public money towards interest payments, limiting room for defence, infrastructure and other spending priorities.
Governments across the world are facing a growing fiscal squeeze as the cost of servicing public debt climbs to levels that are increasingly competing with essential areas of government spending.
The combined debt-servicing bill for members of the Organisation for Economic Co-operation and Development (OECD) exceeded $2 trillion in 2025, equivalent to around 3 per cent of the group’s economic output. At the same time, borrowing by OECD governments is expected to reach a record $18 trillion this year.
The pressure is particularly visible in some of the world’s largest advanced economies. The United States, Britain and France are now spending more on servicing government debt than on defence, while more than a dozen OECD countries face a similar imbalance.
The problem stems from the combination of record debt accumulated over the past decade and a sharp increase in borrowing costs. Governments were able to finance large amounts of borrowing relatively cheaply for years as central banks maintained ultra-low interest rates and purchased government bonds. That environment has now changed.
The average 10-year government bond yield across the Group of Seven economies has reached about 4 per cent, its highest level since 2008. Higher yields mean governments must pay more when they refinance existing debt or issue new bonds, gradually increasing the share of tax revenue required to meet interest obligations.
More from BusinessThe United States has seen its government debt climb to a record $40 trillion. The country is also facing persistent budget deficits, increasing concerns over the long-term trajectory of its finances.
Britain and France are under particular pressure because of relatively weak growth and elevated borrowing costs. The UK is currently paying about £110 billion a year in interest on its debt. Debt-interest costs are projected to approach 4 per cent of GDP by 2030-31, roughly twice their pre-pandemic share.
France is confronting similar market pressure, with the gap between its 10-year borrowing costs and those of Germany widening sharply. Rising interest expenses are adding to the difficulty of reducing the country’s fiscal deficit while maintaining public services and other spending commitments.
The broader debt picture is also deteriorating. Global public debt reached 94 per cent of world GDP last year, more than 10 percentage points above its pre-pandemic level. The International Monetary Fund expects the ratio to reach 100 per cent by the end of this decade.
Higher interest payments are creating a potentially damaging feedback loop. As governments borrow more to cover existing obligations, investors may demand higher yields to compensate for increased fiscal risks. Those higher yields then raise future debt-servicing costs, putting further pressure on public finances.
Governments have limited options to break this cycle. They can raise taxes, reduce spending, encourage faster economic growth or attempt to lower borrowing costs. Each carries significant economic or political consequences.
Some governments are already adjusting debt-management strategies by issuing more short-term bonds, which can initially reduce interest expenses. However, relying more heavily on short-term borrowing also exposes public finances to sudden increases in interest rates.
Ultimately, stronger economic growth could ease the burden by boosting government revenues and reducing debt relative to GDP. Without such an improvement, governments may increasingly have to choose between servicing existing debt and funding priorities such as defence, energy security and public services.
