The $2 Trillion Interest Bill That’s Hitting Governments
Debt-servicing costs complicate plans in many countries for more military, climate spending
By Chelsey Dulaney, Andrew Duehren and Peter Santilli
The world spent the past decade-plus taking advantage of rock-bottom interest rates to binge on debt.
An unprecedented bill is coming due.
Governments are expected to spend a net $2 trillion paying interest on their debt this year as higher interest rates make borrowing more expensive, up more than 10% from 2022, according to an analysis of International Monetary Fund data by research consulting firm Teal Insights and a separate analysis by Fitch Ratings.
By 2027, it could top $3 trillion, according to Teal Insights.
The surge in interest costs leaves governments with difficult choices.
As debt servicing takes up more revenue, politicians face unpopular decisions to raise taxes, cut spending or keep running deficits that will add to interest costs.
That comes as they face higher military spending amid escalating geopolitical uncertainty, as well as the costs of responding to extreme and costly weather events and caring for rapidly aging populations.
In the developing world, trade-offs are even starker—between paying debt and making other necessary payments, such as for public servants’ salaries or for imports such as wheat and fuel.
Governments’ interest costs are only one part of the world’s growing debt burden.
That doesn’t include the cost of repaying bonds that are maturing or interest owed by consumers and companies on their debt.
The surge in debt costs is particularly pronounced in the U.S., the largest economy in the world and the one with the most debt.
The U.S. federal government spent a record $659 billion on net interest payments last fiscal year, according to the Treasury Department.
At 2.45% of gross domestic product, net interest payments were the highest share of the economy since 1998, according to Treasury.
Net interest is already one of the most costly government expenses, behind spending on the military and entitlement programs such as Medicare and Social Security.
Over time, the Congressional Budget Office expects that net interest could become the single largest government expense.
Debt costs could grow faster if interest rates are higher than expected.
Even with the growing debt burden, the U.S. economy has remained strong.
Still, larger interest expenses could eventually weigh on economic growth, economists say, as money flows into government bonds rather than productivity-enhancing private enterprises.
Republicans say Washington should address the deficit by slashing spending, while Democrats would rather raise revenue, leaving them nowhere close to agreement.
While the U.S. is expected to account for a third of all government debt interest paid this year, the problem of rising costs plagues many countries. And much of the world is experiencing more economic fallout than the U.S.
China’s economy is struggling under a mountain of debt taken on by local governments and property developers to fuel the country’s infrastructure push.
Much of China’s government borrowing is done by local authorities and is off balance sheet, making it hard to track.
Analysts estimate that so-called local government financing vehicles, or LGFVs, have accumulated more than $9 trillion in debt—equal to roughly half of China’s GDP.
China’s debt problem stems not from rising interest rates but from the scale and speed at which debt was taken on.
Many investments have done poorly, returning far less than the interest rates LGFVs must pay to their lenders, according to Rhodium Group.
Beijing has pledged to defuse the situation by offering support for the property sector and helping local governments swap LGFV debt for cheaper bonds backed by the government, according to local media.
Meanwhile, consumers have pulled back on spending as real-estate prices plunged, weighing on Western brands that depend on Chinese consumers for sales.
“Ultimately the secret to resolving debt is not a secret at all: It’s a political process of allocating losses,” said Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management.
“The bad news is that the typical losers are those most politically vulnerable: households.”
In Europe, concerns remain over heavily indebted countries such as Italy, but overall debt levels are forecast to ease in the coming years.
European Union rules requiring that members limit budget deficits to 3% of GDP and debt-to-GDP to 60% are expected to kick back in next year, even as countries increase military spending in the wake of Russia’s invasion of Ukraine.
Those rules were suspended through the pandemic and energy crisis.
Investors have grown sensitive to governments’ spending plans.
Proposals from administrations in Italy and the U.K. for tax cuts have fueled market volatility.
In poorer countries, policy makers are already choosing between spending on citizens and crucial imports or paying debt.
Lesetja Kganyago, governor of South Africa’s central bank, said in an interview last month that his country now spends more paying debt interest than it does on health. “It looks like it might soon be the case with education, too,” he said.
About a dozen countries this year are expected to spend a quarter or more of their revenue paying interest on government debt, according to Teal Insights’ analysis of the IMF’s forecasts.
For most developed markets, that ratio is below 10%.
In Egypt, where debt interest is expected to reach nearly 40% of government revenue this year, the government has struggled to pay for wheat imports and recently attempted to barter with Kenya for black tea imports, according to media reports.
Pakistan’s government has cut spending on education, health and development as interest costs exploded.
The debt crisis helped drive 12.5 million people there into poverty in the past year, according to the World Bank.
Teal Emery, founder of Teal Insights, says he fears more countries will be forced to default on their debts as the rise in rates cuts off funding.
China has pulled back on lending to the developing world as many of those projects struggle and Beijing struggles to contain its own debt crisis.
Asset managers and other investors have pulled away from risky bets on developing countries as rising rates on ultrasafe U.S. bonds beckon.
“We have this smoldering development crisis,” Emery said.
“Every dollar that’s going to pay debt service is not a dollar that’s going to help education, to building infrastructure that will create growth.
You see increases in poverty.”
Rebecca Feng and Eric Sylvers contributed to this article.
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