Global debt interest tops defense spending

OECD members spent more than $2 trillion a year on government debt interest in the latest year reported, equal to 3.19% of GDP and above 3% for a second straight year. In more than 10 OECD countries, including the US, Britain and France, debt-service costs now exceed defense spending, according to the report cited by the Financial Times.

The strain is coming from the combination of record debt loads and higher rates, not from recession alone. The US federal debt crossed $40 trillion last month, and OECD governments are expected to borrow another $18 trillion this year, a fresh record. Michael Riddle, a portfolio manager at Fidelity International, said governments must refinance “enormous” debt stacks at increasingly high rates and warned that global investors are already starting to fear the scale of the problem.

The market backdrop helps explain why. Ten-year government bond yields across the G7 are nearing 4%, their highest levels since the years after the global financial crisis, after years in which central banks kept financing costs artificially low through emergency bond-buying programs. Those supports have faded, leaving sovereigns exposed to a market that is less forgiving of fiscal excess and more sensitive to inflation risk, geopolitical shocks and the flood of supply from both public and private borrowers.

Britain is an acute example. Its annual debt-interest bill has climbed to about 110 billion pounds, higher than during the market turmoil that followed former Prime Minister Liz Truss’s tax-cut plan in 2022. In France, the burden is feeding political instability as successive governments struggle to reconcile weak growth, unpopular spending restraint and rising financing costs. British finance minister Rachel Reeves has framed the issue in political terms, saying one in every 10 pounds of government spending goes to interest and that such a burden is “not progressive.”

For investors, the implications are broader than sovereign debt alone. Higher government borrowing costs can set a floor under long-term yields, keep pressure on duration-heavy assets and compete with private borrowers for the same pool of savings. That is already visible in credit markets, where rising sovereign issuance sits alongside heavy funding needs from tech companies and other corporates. The squeeze can also widen the gap between stronger and weaker issuers, as markets differentiate between countries that can still grow out of debt and those that cannot.

The bull case is that stronger nominal growth, easing inflation and eventual rate cuts could relieve the interest burden over time. The bear case is that growth in much of the developed world stays too weak to stabilize debt ratios, while persistent deficits force governments to keep rolling over liabilities at yields near current levels or higher. With global public debt already near 94% of world GDP and the IMF seeing it reaching 100% by 2030, the narrative now is less about a temporary funding shock than a structural test of whether advanced economies can keep financing themselves without paying an ever-rising premium.