CNA Explains: Why global public debt is swelling – and why it matters

Government debt around the world is skyrocketing, prompting warnings from international institutions that countries may be entering a more fragile and uncertain economic era. 

The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) warn that public debt is hitting levels not seen since World War II, when governments faced years of painful repayment and rebuilding. 

In the United States for instance, national debt has surpassed US$38 trillion, approximately double its level a decade ago. 

So why is public debt rising so fast, and when does it become a problem?

What is government debt, and why do countries borrow? 

Government debt is money borrowed to finance spending when revenues fall short. It is typically raised by issuing bonds to domestic or foreign investors. 

Debt plays a crucial role in modern economies. Banks take deposits and lend them out as credit, allowing money to circulate and multiply. That credit – and the debt behind it – fuels consumption, investment and economic growth. 

For governments, borrowing allows spending during crises. 

“It’s great for the government to be able to borrow in a financial crisis or a pandemic, to deal with a recession, to pay for infrastructure,” said Kenneth Rogoff, an economics professor at Harvard University. 

Raising debt in such moments is often more efficient than sharply raising taxes. 

In that sense, debt is not inherently harmful.

Why are economists worried now? 

The concern is not just how much debt governments have, but how fast it is growing and how expensive it has become. 

A significant portion of today’s debt was accumulated during years of ultra-low interest rates, most recently during the COVID-19 pandemic, when central banks cut rates to encourage borrowing and support economies hit by lockdowns.

Since then, interest rates have risen sharply. As lenders demand higher returns, governments are forced to spend more of their budgets just to service existing debt. 

That squeezes spending elsewhere. 

“Every time you are borrowing or maintaining debt, you have less amount at your disposal to spend elsewhere, such as on social care, healthcare, defence and education,” said Vishnu Varathan, head of macro research at Mizuho Bank. 

Does all debt have the same impact?

No. Economists stress that how debt is used matters as much as how much is borrowed. 

“One needs to look at the efficiency of spending. Some debt is better than others and some spending is better than others,” said Bert Hofman, a senior fellow at the National University of Singapore’s East Asian Institute. 

“If you only incur debt for consumption expenditures, you will not have that productivity effect that would pay back for the debt.” 

Debt becomes more problematic when it fails to support growth, especially as servicing costs rise.

How widespread is the problem?

According to the IMF, global debt is now on a steeper path than before the pandemic. 

About a third of countries have debt levels higher than pre-COVID levels and rising faster, accounting for around 80 per cent of global GDP. They include the United States, China, France, the United Kingdom, Brazil and South Africa.

More than 40 per cent of the world’s population live in countries that now spend more on servicing debt than on health and education, says the United Nations.

Governments are also facing rising pressures from ageing populations, economic security and climate risks, said Era Dabla-Norris, deputy director of the IMF’s fiscal affairs department. 

“These spending needs need to be accounted for, even as political red lines on taxation are becoming more entrenched,” she added.

Is the world heading for a debt crisis?

Not just yet, economists say, but they warn the risks are building. 

“There’s a big question mark as to where long-term growth prospects are headed,” said Dabla-Norris, adding that another uncertainty is whether interest rates will remain higher for longer amid volatile financial conditions and geopolitical tensions.

There is no single debt threshold that applies to all countries. “It depends upon the growth prospects of a country … its own vulnerability to shock … and the composition of debt,” she said. 

The IMF warns global debt could exceed the value of global economic output by 2029, reaching its highest level since 1948 and continuing to climb. 

What happens when debt becomes too high?

When growth alone is no longer enough to manage debt, governments face difficult choices. 

They can cut spending, raise taxes, restructure or default on debt, or rely on central banks to suppress interest rates by buying government bonds and creating new money. 

Such measures shift the burden onto citizens through inflation, which erodes savings and purchasing power. 

“If we think that’s the solution, that’s where we get trapped. Because debt, one way or the other, will assert itself,” said Varathan.

“Debt is such an integral part of the economy. The question is not whether we should have debt or not have debt. It’s how the debt is managed.”

As interest costs rise and growth prospects remain uncertain, economists warn that ignoring debt today will sharply limit governments’ choices tomorrow.