Government debt interest costs hit highest level since 2007

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Interest payments are swallowing the biggest portion of rich nations’ economic output since at least 2007, outstripping their spending on defence and housing, according to figures from the OECD. 

Debt service costs as a percentage of GDP for the 38 OECD countries climbed to 3.3 per cent in 2024, a sharp rise from 2.4 per cent in 2021, according to the group’s Global Debt Report on Thursday. In contrast, the World Bank estimates that the same group spent 2.4 per cent of GDP on their militaries in 2023.

Interest costs were 4.7 per cent of GDP in the US, 2.9 per cent in the UK and 1 per cent in Germany.

Borrowing costs have risen in recent months as bond investors brace for persistent inflation in large economies and rising issuance as many governments expand spending on defence and other fiscal stimulus policies.

The OECD warned that the double hit of rising yields and growing indebtedness risked “restricting capacity for future borrowing at a time when investment needs are greater than ever”. It highlighted a “difficult outlook” for global debt markets.

Sovereign borrowing among the high-income group of countries is expected to reach a fresh record of $17tn in 2025, compared with $16tn in 2024 and $14tn in 2023, according to the OECD report. This wave of debt issuance has fuelled concerns over sustainability in countries such as the UK, France and even the US. 

The large debt burden itself was “not negative”, said Carmine Di Noia, the OECD’s director for financial and enterprise affairs.

But a lot of the borrowing over the past 20 years had been spent on recovering from the 2008 financial crisis and the Covid-19 pandemic, he added, arguing that “now there are needs to shift from recovery to investment”, such as spending on infrastructure and climate projects.

“Borrowing must increase growth” so that governments can eventually be “stabilising and actually reducing the debt-to-GDP ratio”, said De Noia.

But the picture is complicated by higher bond yields, which make it more expensive to refinance existing debt.

The report noted that almost 45 per cent of OECD sovereign debt would mature by 2027. “There has been a lot of issuance in favourable conditions,” said Di Noia, adding that those conditions have altered for the worse.

Adding to the expensive debt-servicing conditions is a changing profile of holders of sovereign bonds, the OECD said. As policymakers unwind emergency bond-buying programmes, central bank holdings of government bonds have fallen by $3tn from their 2021 peak, and are expected to fall by another $1tn this year.

This means that private investors — whom Di Noia said were “more price sensitive” — will be making up the difference. The sensitivity leaves issuers open to more volatility and makes them more exposed to “heightened geopolitical and macroeconomic uncertainty”, he added.