The world’s $2tn interest bill 

Mount ing bor row ing costs and record debt are squeez ing pub lic fin ances, for cing gov ern ments to choose between higher taxes, spend ing cuts and vital pri or it ies such as defence.

Financial Times Europe 8 Sep 2026 Data visu al isa tion by Jonathan Vin cent By Ian Smith, Sam Flem ing and Emily Her bert

 The world’s gov ern ments have cre ated a $2tn mon ster — a debt-ser vi cing bur den that gobbles up tax rev en ues and has the power to over whelm elec ted lead ers. More money is now spent on ser vi cing the national debt than on defence in the UK, France and the US; the same is true for more than a dozen states in the 38mem ber OECD rich coun tries’ club. Their prob lem is that bor row ing costs have climbed to the highest in almost two dec ades just as gov ern ments are tak ing on record debt. The total owed by the US gov ern ment reached a record $40tn last month. This year, OECD nations are expec ted to bor row $18tn between them, another all-time high. In 2025, the group’s total debt-ser vi cing bill exceeded $2tn, or 3 per cent of GDP. That num ber is set to rise in the com ing years because of the bond sell-off that has pushed up yields since the Covid-19 crisis, increas ing the cost of debt for gov ern ments across the world. “These massive sov er eign debts are hav ing to get refin anced at ever-increas ing rates,” says Mike Rid dell, a fund man ager at Fidel ity Inter na tional. “Global investors are already start ing to get scared.”

The sum mer rout in the global bond mar ket has only aug men ted the post-Covid surge in yields triggered by infla tion shocks, increased gov ern ment bor row ing and the end of cent ral banks’ “quant it at ive eas ing” bond-buy ing pro grammes. The aver age bench mark 10year bond yield for G7 coun tries has reached 4 per cent for the first time since 2008, amid con cerns about the infla tion ary impact of the Iran war and the sheer amount of debt being sought by both the pub lic and private sec tors — par tic u larly tech groups. Some eco nom ists counter that US yields in par tic u lar are being pushed up by improv ing growth expect a tions, which imply that interest rates will not need to be as low in the future to sup port the eco nomy. If there were a step change in growth, it could be a get-out-of-jail free card for many coun tries, boost ing tax receipts, mak ing the stock of debt more man age able and redu cing the trade-off between interest costs and other areas of spend ing. But at present the pan or ama looks very dif fer ent. For big indebted eco nom ies with low growth such as the UK and France, debt ser vi cing has already forced a reck on ing in the man age ment of the pub lic fin ances. For Bri tain, a sharp rise in bond yields helped eject former prime min is ter Liz Truss from power in 2022 after an unfun ded tax cut ting “mini” Budget. But yields are higher still now: the UK’s interest pay ments are cur rently £110bn a year. In turn, France has churned through three prime min is ters since par lia ment ary elec tions in 2024, partly because of fiscal pres sures set off by the cost of debt. In both coun tries and in many oth ers across the world, politi cians face a fun da mental choice on whether to raise taxes or shrink the state to get them selves out of the corner they find them selves in. 

The sheer scale of debt-ser vi cing costs also makes it supremely diffi  cult for coun tries to raise spend ing for stra tegic pri or it ies such as national defence and energy secur ity. “If debt interest were a gov ern ment depart ment, it would be the second biggest in White hall after health, big ger than defence, the Home Office and justice put together,” John Healey, Bri tain’s new chan cel lor of the exchequer, said yes ter day. “There’s noth ing pro gress ive about the gov ern ment spend ing £1 in every 10 [pounds] on debt interest.” Up until the 2008 global fin an cial crisis, interest rates were rel at ively high for major eco nom ies, but levels of debt were gen er ally much lower. After that, debt surged but interest rates were kept lower by emer gency meas ures taken by cent ral banks as well as low eco nomic growth. Now, by con trast, poli cy makers face an unen vi able com bin a tion: record debt and high bor row ing costs. 

While gov ern ments are still find ing enough buy ers for their debt, investors are demand ing a higher price for their money. New bond sales in recent months for the UK, the US and oth ers have locked in the highest yields in almost two dec ades for longer-dated debt. This shift has been accel er ated by changes to pen sion schemes in some coun tries that have meant tra di tional long-term buy ers step ping back, replaced by fast-money hedge funds that can be quick to demand higher yields. “The era of free money is defi n itely over,” says Kim Craw ford, a global fixed income man ager at JPMor gan Asset Man age ment. “The bond mar ket is [now] look ing for dis cip line.” The nature of gov ern ment debt mar kets, in which gov ern ments fund them selves with debt that is repaid at a wide range of dur a tions, some com ing due dec ades into the future, means that the trans mis sion of higher bor row ing costs into higher interest costs occurs gradu ally over time. But the dir ec tion of travel seems clear. The US’s Con gres sional Budget Office estim ates that Amer ica’s debt costs will double over the next dec ade and, on the cur rent tra ject ory, exceed Social Secur ity spend ing after 2047. The bur den for other coun tries — which typ ic ally find it harder than the US to con vince investors to buy their bonds on favour able terms — is likely to be higher still. The causes of the prob lems with pub lic fin ances are deep-rooted and lon grun ning. They include a surge in spend ing to battle the Covid-induced slump and energy crises, as well as broader fiscal chal lenges since the fin an cial crisis brought down rates of growth. Global pub lic debt hit 94 per cent of world GDP last year, up more than 10 per cent age points since the year before the pan demic. The IMF now believes it will reach 100 per cent by the end of this dec ade. This sum mer’s bond sell-off has aggrav ated the prob lem. Infla tion ary pres sures stoked by the Iran war, ini tially in energy prices, have forced cent ral banks to pivot towards rate increases. 

The European Cent ral Bank raised rates in June for the first time since 2023, and is expec ted to do so again this week, while Fed eral Reserve chair Kevin Warsh has begun to tee up an increase as soon as this month. Some investors argue the uncer tainty over infla tion is feed ing into higher long-term rates, with the mar ket demand ing more to lend to a gov ern ment over the long term. Oth ers think that the higher yields are more a reflec tion of wor ries over grow ing debt sup ply, both from gov ern ments but increas ingly from the cor por ate sec tor. The stock of com bined gov ern ment and cor por ate debt glob ally is approach ing $300tn, accord ing to the Insti tute of Inter na tional Fin ance, a think-tank. Con cerns about the lim its of mar kets’ will ing ness to fin ance such a spec tac u lar amount of debt come on top of investors’ wor ries about developed gov ern ments’ unwill ing ness to rein in bor row ing. The US fiscal defi cit, for example, is pro jec ted to remain above 7 per cent of GDP into the 2030s, accord ing to the IMF, des pite the coun try’s rel at ively steady growth and an unem ploy ment rate of just 4.1 per cent today.

Polit ical volat il ity has already led to higher debt interest costs than would have been paid oth er wise, some investors argue, in what is some times dubbed the “moron premium”. In Europe, polit ical fra gil ity since 2022 has added €100bn to interest expenses for the UK, Italy, France, Spain and Bel gium, estim ates insurer Alli anz. Part of the rise in yields this year could be investors demand ing com pens a tion for polit ical ruc tions to come. Another factor unset tling the bond mar ket this year has been events in Japan, for a long time the anchor that helped to hold down global bor row ing costs due to its neg at ive interest rate regime and vora cious demand for for eign assets. Now, the coun try’s cent ral bank is increas ing interest rates just as Prime Min is ter Sanae Takai chi embraces stim u lat ory gov ern ment spend ing. As Tokyo’s bor row ing costs climb to levels not seen since the 1990s, investors are fret ting that the higher yields at home will attract money back from other mar kets, push ing up costs else where. 

One big worry for investors is that some coun tries may be edging towards a vicious cycle in which rising debt costs make the fiscal out look still worse. In this “doom loop” scen ario, the sheer scale of interest charges a gov ern ment has to pay under mines the health of its fin ances and pushes up its debt, caus ing investors to push for higher yields that then drive up the cost of debt ser vi cing still fur ther. Unless lower interest rates or a surge of growth res cue gov ern ment fin ances, the only altern at ives are to increase tax rev enue or cut spend ing. But mar kets are increas ingly con cerned that in many instances diffi cult cuts are polit ic ally unachiev able, whether it is a ques tion of rein ing in wel fare expendit ure in the UK or trim ming over all gov ern ment spend ing in the US. Indeed, Pres id ent Don ald Trump wants to increase the US defence budget to $1.5tn, the biggest rise since the second world war. Politi cians “don’t want to make these hard choices because they know if they do make these hard choices they are going to get kicked out at the next elec tion”, says Neil Mehta, a port fo lio man ager at RBC Blue-Bay Asset Man age ment. “I don’t know how this resolves itself.” The anxi ety sur round ing US indebted ness is bleed ing into global mar kets and infect ing any other sov er eign bor row ers seen as par tic u larly fra gile — among them other “serial offend ers” such as Bri tain, Italy and France, says David Rees, head of eco nom ics at asset man ager Sch roders. Some investors have this year dubbed the trio the “Bifs”, for their high debt loads and vul ner ab il ity to the energy shock. While the dol lar’s status as the world’s premier reserve asset means many investors have little option but to buy Treas ur ies, other coun tries’ fin ance min is ters may well have to do more than the US to get their fiscal houses in order.

“No one is expect ing mir acles” in terms of defi cit reduc tion, says Gilles Moëc, chief eco nom ist at insur ance com pany Axa. But coun tries need to show they can get or keep the head line defi cit on a declin ing path even if the US is unlikely to do so. A key test in the UK will come next month with the first Budget since Andy Burnham became prime min is ter in July. Higher debt costs, includ ing from the UK’s large stock of infla tion-linked bonds, are eat ing up resources at a time when the gov ern ment faces pres sure to improve pub lic ser vices and fund pledges to lift defence spend ing. That has triggered spec u la tion that another round of tax increases will be required on top of big rev enue-rais ing Budgets in 2024 and 2025. Bullish investors say Bri tain, unlike some other coun tries, has taken hard choices. Gross debt issu ance is actu ally down this fiscal year. But the UK’s bor row ing costs are the highest in the G7 and the coun try’s spend ing on debt interest is expec ted to reach nearly 4 per cent of GDP by 2030-31, roughly double its share in the years run ning up to the pan demic. France is facing sim ilar pres sure in fund ing mar kets, driv ing the spread between its 10-year bor row ing costs and those of Ger many’s ultra-safe debt — a key baro meter of con cern over Paris’s fin ances — to about 0.9 per cent age points, close to its highest level since the after math of the Euro zone debt crisis. Some Wall Street banks have down graded their estim ates for Paris’s pub lic fin ances. Mor gan Stan ley now thinks the coun try’s fiscal defi cit could hit 5.4 per cent of GDP this year, well above the gov ern ment’s 5 per cent tar get.

 Decis ive action to rein in bor row ing remains diffi cult at a time of ped es trian growth and the chal lenge from the far-right Rassemble ment National in the April 2027 pres id en tial elec tion. Today’s politi cians are being forced to make “dir ect trade-offs between vitally import ant areas of spend ing and the debt interest bill”, says Car mine Di Noia, dir ector for fin an cial and enter prise affairs at the OECD. “Your interest bill is dir ectly con strain ing fiscal policy.” How do coun tries escape from their debt cage? One option is so-called fin an cial repres sion, meas ures that com pel domestic insti tu tions to buy more of their coun try’s debt to sup port demand and push down yields. A hap pier out come would be mean ing ful pro ductiv ity growth, driven by the AI revolu tion, that would in turn make gov ern ments’ debt bur dens much more man age able. In the UK, the Office for Budget Respons ib il ity, Bri tain’s fiscal watch dog, said recently that in a “high-pro ductiv ity scen ario” for the coun try’s eco nomy, the debt bur den as a pro por tion of GDP in 2075 would be just over half the baseline fore cast, albeit still a daunt ing 180 per cent. Some are scep tical the growth cav alry will res cue the rich world en masse from its budget dilem mas. For what he calls “bas ket cases” like the UK and France, RBC Blue Bay’s Mehta says “the prob lems with growth are more struc tural . . . You do have to cut spend ing.” 

His tory sug gests gov ern ments will even tu ally do so. In a 2013 paper examin ing the exper i ence of 55 coun tries for up to two cen tur ies, IMF eco nom ists observed that “increases in the cost of sov er eign bor row ing prompt poli cy makers to tighten fiscal policy in response”. The UK has come back from big ger bur dens. Its debt pile reached a record high of about 250 per cent of GDP after the rav ages of the second world war, but spend ing restraint and eco nomic growth helped by immig ra tion sent it tum bling. Another pos sible course was taken by Canada in the 1990s, when the gov ern ment respon ded to a gap ing defi cit with pain ful spend ing cuts. “If you pre pare them well, people will under stand,” Paul Mar tin, the fin ance min is ter at the time, later told the FT. “They will not stay with you unless they feel that the sac ri fice you’re ask ing of them is going to suc ceed.” In the UK, some investors view tax rises as a bet ter way to close the rev enue gap, if the gov ern ment can avoid meas ures that fuel infla tion. But in many coun tries, it will be polit ic ally costly in the extreme to cut spend ing fur ther, or pile more taxes on house holds and busi nesses strug gling with the cost of liv ing. “The prob lem is that mar kets don’t see a polit ical will to make it work and to rein [debt] in,” says Tat jana Greil-Castro, global head of invest ments at Muzinich. “If you don’t rein it in, it will get worse and worse. [Then] it will have to end in a crisis.”