Rich countries are paying more interest on debts than spending on their militaries

Interest payments have become the largest drain on the economic output of wealthy nations since at least 2007, surpassing their expenditures on defence and housing, according to a Financial Times report, citing OECD data.

Debt service costs as a percentage of GDP for the 38 OECD countries rose to 3.3% in 2024, up from 2.4% in 2021, according to the report, citing the group’s Global Debt Report on Thursday.

In comparison, the World Bank estimates that these countries allocated 2.4% of GDP to their military spending in 2023. Specifically, interest costs accounted for 4.7% of GDP in the US, 2.9% in the UK, and 1% in Germany.

In recent months, borrowing costs have increased as bond investors prepare for ongoing inflation in major economies and rising debt issuance due to government spending on defence and fiscal stimulus.

The OECD warned that the combination of rising yields and increasing debt levels risked “restricting capacity for future borrowing at a time when investment needs
are greater than ever”. It highlighted a “difficult outlook” for global debt markets, reported FT.

According to Financial Times, citing OECD report, sovereign borrowing among high-income countries is projected to reach a record $17 trillion in 2025, up from $16 trillion in 2024 and $14 trillion in 2023. This surge in debt issuance has raised concerns about sustainability in countries like the UK, France, and the US.

Sovereign borrowing among the high-income group of countries is expected to reach a fresh record of $17tn in 2025, compared with $16tn in 2024 and $14tn in 2023, added the report.

This wave of debt issuance has fuelled concerns over sustainability in countries such as the UK, France and even the US.

“The large debt burden itself was not negative,” FT quoted Carmine Di Noia, the OECD’s
director for financial and enterprise affairs, as saying.

But a lot of the borrowing over the past 20 years had been spent on recovering from the 2008 financial crisis and the Covid-19 pandemic, he added, arguing that “now there are needs to shift from recovery to investment”, such as spending on infrastructure and climate projects.

“Borrowing must increase growth” so that governments can eventually be “stabilising and actually reducing the debt-to-GDP ratio,” De Noia was quoted as saying.

However, the situation is complicated by rising bond yields, which increase the cost of refinancing existing debt. The report indicated that nearly 45% of OECD sovereign debt is set to mature by 2027.

“There has been a lot of issuance in favourable conditions,” said Di Noia, adding that those conditions have altered for the worse.

The OECD noted that a shifting profile of sovereign bond holders is contributing to the costly debt-servicing conditions. As policymakers wind down emergency bond-buying programmes, central bank holdings of government bonds have decreased by $3 trillion from their peak in 2021, with an expected further decline of $1 trillion this year.

This shift means that private investors — whom Di Noia said were “more price sensitive”—will fill the gap. This sensitivity exposes issuers to greater volatility and increased risks from “heightened geopolitical and macroeconomic uncertainty,” he added.

With inputs from agencies