Global Public Debt: Why Governments Have Less Room for Error

Earlier this month (October 2026), the International Monetary Fund (IMF) published its yearly report, World Economic Outlook. It included a very interesting set of graphs relating to government finances:

Across the world, governments are facing a challenging fiscal environment. Global public debt remains near historic highs following major economic disruptions such as the COVID-19 pandemic. At the same time, higher interest rates, ongoing budget deficits, and a heavy reliance on short-term borrowing are making it substantially more expensive for nations to manage their debt.

The takeaway from recent IMF data is clear: While strong economic growth can help stabilize debt burdens over time, the combination of elevated debt levels and higher refinancing costs leaves governments with less room for error than in the previous decade.

Key Takeaways Explained Simply: Four Pressures

1. Debt Remains Near Record Highs

Historically, global public debt has surged after major crises and has tended to subside following periods of economic stabilization. Today, global public debt as a share of GDP sits around 100%, far higher than before the COVID pandemic.

2. Annual Deficits Are Still Wide

A government runs a “primary deficit” when its regular spending (excluding interest payments) exceeds its revenue from taxes. In most major economies, including the U.S., China, France, and the U.K., primary deficits from 2020 through 2025 have stayed wider than their pre-pendemic averages. Current government plans do not appear sufficient to reduce spending or increase revenues enough to prevent debt ratios from rising further.

3. Borrowing Costs Have Risen

During the 2010s, record-low interest rates made it cheap for governments to borrow. Over the past three years, real (inflation-adjusted) interest rates have risen substantially in the US, the UK, Europe, and Japan. This directly increases the interest expense taxpayers and governments must cover.

4. The Rollover Risk: Short-Term Debt Meets Higher Rates

A substantial portion of government debt has relatively short maturities. When these obligations mature, governments often refinance them by issuing new debt rather than repaying them outright. We call this process refinancing risk (also known as a rollover risk). Because these new bonds carry higher interest rates, debt servicing costs will continue to rise over the coming years. 

Why This Matters

When a government spends an increasing share of its budget on interest payments, it creates two major challenges:

• Crowding Out Priorities: Fewer resources remain available for public investments, healthcare, infrastructure, education, and national defence.
• Eroded Buffers (“Fiscal Space”): In a healthy economy, governments keep debt manageable so they can step in with support during emergencies (e.g., recessions, health crises, or geopolitical events). With debt already stretched thin, the room to maneuver during the next downturn is significantly constrained.

Conclusion

The IMF data highlights a fragile equilibrium. Managing elevated debt levels while refinancing obligations at higher rates will require careful fiscal discipline. I remain highly skeptical that government officials will succeed. While it is impossible to predict the catalyst of the next financial crisis, elevated sovereign debt levels and shrinking fiscal space appear to be important vulnerabilities that deserve close attention. I may be overly concerned, but the data certainly reinforces that view.