Driven by defence spending, global govt borrowing set to hit record $12.3 tn in 2025

Global government borrowing is projected to hit a record $12.3 trillion this year, driven by increased defence spending and other expenditures in major economies, along with rising interest rates.

According to a Financial Times report, citing S&P Global Ratings, a 3% increase in sovereign bond issuance across 138 countries will raise the total debt stock— already inflated by the global financial crisis, the COVID-19 pandemic, and the need for heightened European defence spending — to an estimated $76.9 trillion.

Big economies’ focus on fiscal policy to “deal with crisis after crisis continues, and the outcome is you do have a much more indebted sovereign picture,” FT quoted Roberto Sifon-Arevalo, global head of sovereigns at S&P, as saying.

This has been further exacerbated, he said, by rising debt-servicing costs, as bond yields have significantly increased since central banks ended their bond-buying programmes.

“Borrowing to fund higher spending was fine and sustainable while you had the borrowing costs that you had before the pandemic; now it presents a much bigger problem,” Sifon-Arevalo was quoted as saying.

Deteriorating public finances are increasingly worrying major investors.

According to the report, bond giant Pimco warned in December of plans to reduce its exposure to long-dated US debt due to “debt sustainability questions.”

Billionaire investor Ray Dalio has cautioned that the UK risks falling into a “debt death spiral,” where escalating borrowing leads to a self-perpetuating bond sell-off, added the report.

In the US, the world’s largest borrower, “wide fiscal deficits, high interest spending and substantial debt refinancing requirements” would push long-term issuance to $4.9tn, FT quoted S&P, whose figures exclude short-term Treasury bills and other forms of public
borrowing, such as local government debt, as saying.

The agency predicts that the US fiscal deficit will exceed 6% of GDP by 2026, but argues that the dollar’s status as the world’s primary reserve currency will provide the US with “significant flexibility” in managing its public finances, reported FT.

China, the world’s second-largest borrower, is likely to increase its long-term issuance by over $370 billion, reaching $2.1 trillion as it invests heavily to revive its domestic economy. In contrast, borrowing outside the G7 and China is likely to remain largely flat.

Overall, global debt is projected to reach 70.2% of GDP, having steadily risen since 2022 but remaining below the 73.8% peak in 2020 due to pandemic-related spending.

According to the report, S&P also noted a significant decline in credit quality for several large economies since the global financial crisis, with the share of debt from top AAA-rated borrowers decreasing as countries like the US and UK fall from this highest rating.

The recent rise in the supply of government debt was combining with investors’ worries about the economic outlook to create “steeper yields and renewed investor concerns about weak fiscal positions in many advanced economies," FT quoted S&P as saying.

Sifon-Arevalo said there was investor appetite to absorb the debt issuance, as bond funds’ assets under management had grown. But the cost of servicing the rising debt burdens would hit governments’ other ambitions, such as infrastructure spending, he added.

This was feeding “changes in the political colours” around the world.

“The growth of more fiscally conservative [political] movements is not unrelated to the fact that you have seen this massive growth in fiscal deficits and debt,” he said.

With inputs from agencies