How much debt is too much? That question has haunted governments for millennia, but rarely has it felt as urgent as today. Across the developed and emerging world, borrowing is climbing to heights that unsettle economists, investors and policymakers alike. A fiscal experiment is playing out in real time.
Very long-run charts of budget deficits and sovereign debt ratios paint a sobering and unarguable picture; fiscal profligacy is no longer an occasional feature of wartime economies but a structural norm. The exception has become the rule.
In the UK, for example, the historical record is indicative. During moments of existential threat — the Napoleonic wars of the 19th century, and the world wars of the 20th — the government understandably ran enormous deficits. Yet, after such episodes of excessive spending, sanity prevailed. Policymakers made painful but decisive choices to restore fiscal balance.
The postwar boom years saw surpluses and (with admittedly some help from inflation) debt burden come down as low as 25% to GDP in 1992, its lowest in modern history.
Since then the tide has completely turned. From the mid-1990s onwards the UK has almost continuously run deficits. The bank bailouts of the 2008 global financial crisis, followed by years of sluggish growth, saw debt to GDP spiral once more. Then came the Covid-19 pandemic and its unprecedented stimulus packages. Today, Britain’s debt to GDP is close to 100% of GDP, levels last seen in the 1960s. Its bond yields hover at their highest since 1998.
The US tells a similar story. Fiscal deficits have steadily widened since the dot-com crash of 2001. The global financial crisis prompted unimaginably expensive bailouts and fiscal interventions to steady the financial sector, while the pandemic pushed federal borrowing to wartime levels.
France, Italy and several other European economies show similar patterns, with their fiscal trajectories diverging sharply from Germany and the more fiscally conservative “Frugal” states. Being locked in the Eurozone also makes them unable to “inflate” away their debt, as they might have done with currencies such as the franc or lira.
Even emerging markets, scarred by the emerging markets debt crises of the 1990s and later aided by debt forgiveness and resource booms, are again approaching record high borrowing levels. South Africa of course illustrates this vividly; our debt to GDP, at just 27% before the 2008 crisis, is now close to 80%.
In a fascinating and wide-ranging interview with the Financial Times, ex International Monetary Fund chief economist Gita Gopinath summarised the problem.
“A major change since the turn of the century is on the fiscal front. Global [public debt] levels are now incredibly high. In 2024, they were around 92% of global GDP. And as a reference, that number was 65% in 2000. So there has been a very substantial increase in global debt.”
What explains this? There are at least three main factors.
Crisis, stimulus, repeat
First is the sequence of economic shocks since the turn of the millennium. Policymakers have faced three systemic crises in rapid succession: the global financial crisis of 2008-9, the Covid-19 pandemic of 2020, and the energy and inflation shock triggered by Russia’s invasion of Ukraine in 2022. To avoid social suffering in developed economies, each demanded large-scale intervention. The West has essentially become too old, and too lazy, to deal with hardship.
In 2008, Western governments poured billions into capital injections, loans and guarantees to stabilise the financial system. Central banks slashed interest rates to zero or below and launched open-ended quantitative easing to restore liquidity.
The dust had barely settled, with those responsible for the crisis having been bailed out, when the pandemic struck. Lockdowns froze economic activity overnight, essentially forcing those economies (which could afford it) to act as lenders, insurers and employers of last resort. In the US, cheques were even mailed directly to households, an unprecedented experiment in fiscal stimulus. The consequences were staggering deficits, a ludicrous policy reaction in an economy running at close to full employment. Unsurprisingly, just as night follows day, inflation duly followed.
Then, just as the pandemic faded, Russia’s invasion of Ukraine sent energy prices souring. European leaders, once again worried about the social impact on households, provided further support in the form of subsidies, rebates and cost-of-living payments. The fiscal taps opened yet again and inflation became not just a demand-pull phenomenon, such as that in the US, but also cost-push from energy prices.
Strikingly though, such were the levels of borrowing and spending that even this momentary surge in inflation — which has historically eroded debt burdens — failed to significantly reduce debt to GDP.
A cultural shift towards comfort with debt
The second driver is political. Previously, after a war or period of excessive spending, governments looked to consolidate. The immediate aim would be to raise revenues, trim spending and reduce deficits. For various reasons that are not entirely clear, that political consensus no longer exists.
Today, running deficits has become normalised. The rapid-fire shock events of the past few decades may have conditioned policymakers and voters to expect government support as a constant feature, not an exception. Welfare programmes have expanded dramatically, often in ways that would be political suicide to reverse.
South Africa provides a case in point. In 2003, about 30% of households received a social security grant. By 2022 that figure had risen to 46%. The state now spends about 3.5% of GDP on social security, about three times the global median. The Covid-era Social Relief of Distress grant, initially temporary, has become a seemingly permanent fixture. Politically it is untouchable.
South Africa is far from unique, with the same dynamics playing out across developed economies. In the US, neither Republicans nor Democrats have shown serious interest in balancing the budget, short of absurd headline-grabbing measures like Doge, destroying USAid, and cutting Medicaid coverage. Extending the tax cuts of US President Donald Trump’s first term was the core objective of his recent Big Beautiful Bill Act.
The largest drivers of the deficit — tax cuts, social security spending, Medicare and defence — remain untouched. As economic historian Adam Tooze has remarked, the official economic line of the White House amounts to “Baathist-style denialism”; deficits will shrink because growth will go up, all because Trump says so.
Central banks as safety nets
The last factor is the evolution of the role of monetary policy. In countries that can borrow in their own currencies, and which enjoy a degree of financial heft in the global financial system (chiefly the US and Eurozone) the government now relies heavily on central banks as some sort of implicit backstop and buyer of last resort. The vast bond buying programmes of the past 15 years have entrenched this notion that markets never need seriously question sovereign creditworthiness, all because the central bank, in a crisis, will provide liquidity.
A recent paper by John Cochrane and Amit Seru, senior fellows at the Hoover Institution, warns of the perils of this mindset. By fostering expectations of unlimited support, central banks encourage risk taking, inflate asset prices and entrench leverage across the financial system. The result is systemic moral hazard. Governments, investors and companies all behave as if the central bank (and ultimately the taxpayer) will always underwrite their bets.
The risks ahead
Where does this leave us? The short answer is perilously exposed. High debt loads limit governments’ ability to respond to future crises, while rising interest rates magnify the cost of servicing existing debt. Even with all the “exorbitant privilege” in the world, a loss of investor confidence in, say, US Treasuries — the bedrock of the global financial system — could trigger contagion, spreading to other highly indebted borrowers.
Gopinath puts it succinctly. Current debt levels are worrying enough, but the projections are far worse. Global debt to GDP is estimated to reach 100% of GDP by 2030, according to the IMF, but even this is conservative. Unlike in the 2000s, there is no savings glut to soak up excess issuance in a crisis. Long-term yields have returned to pre-2008 levels, and risk premia are rising. The world has shifted to a new environment in which debt markets are less forgiving and fiscal breathing space is much narrower.
This is not just an abstract concern. As Gopinath warns: “Given the existing very high levels of debt, and limited fiscal space to provide a sovereign backstop as existed in 2008/2009, it would not be something easy to recover from.”
The lesson from the fiscal edge is clear. Debt can mount quietly for years, appearing sustainable, until suddenly it is not. Markets, similarly, can remain complacent for much longer than one thinks, until, of course, they are not. DM