World governments spent the past decade taking advantage of rock-bottom interest rates to binge on debt, the global pandemic being just one major cause. An unprecedented bill is coming due. Governments are expected to spend a net USD 2 trillion for interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022, according to an analysis of International Monetary Fund data by researcher Teal Insights. By 2027, it could top $3 trillion. As debt servicing takes up more revenue, politicians face unpopular decisions to raise taxes, cut spending or keep running deficits that will add to interest costs.
Source: Teal Insights analysis of IMF data
The surge in interest costs leaves governments with difficult choices. As debt servicing takes up more revenue, politicians face unpopular decisions to raise taxes, cut spending or keep running deficits that will add to interest costs. That comes as they face higher military spending amid escalating geopolitical uncertainty, as well as the costs of responding to extreme and costly weather events and caring for rapidly ageing populations.
In the developing world, trade-offs are even starker—between paying debt and making other necessary payments, such as for public servants’ salaries or imports such as wheat and fuel. Governments’ interest costs are only one part of the world’s growing debt burden. That doesn’t include the cost of repaying bonds that are maturing or interest owed by consumers and companies on their debt.
The surge in debt costs is particularly pronounced in the US, the largest economy in the world and the one with the most debt. The US federal government spent a record $659 billion on net interest payments last fiscal year, according to the Treasury Department. At 2.45% of gross domestic product, net interest payments were the highest share of the economy since 1998, according to Treasury.
Net interest is already one of the most costly government expenses, behind spending on the military and entitlement programs such as Medicare and Social Security. Over time, the Congressional Budget Office expects that net interest could become the single largest government expense. Debt costs could grow faster if interest rates are higher than expected.
Even with the growing debt burden, the US economy has remained strong. Still, larger interest expenses could eventually weigh on economic growth, economists say, as money flows into government bonds rather than productivity-enhancing private enterprises.
Australia is not immune to higher debt costs and ballooning social security expenses (the NDIS is a classic example of a poorly structured and ever-growing costly liability), yet we are fortunate that our debt burden remains well below that of many of our peers.
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