Fiscal fragilities: Dealing with high debt

Public-sector debt to GDP ratios have generally risen substantially over the past couple of decades. This reflects large-scale government support in response to some severe adverse shocks — the financial crises of 2008–09 and 2011–12 and the COVID-19 pandemic from 2020 — and the persistence of large budget deficits in many economies in the years since.

Public-sector debt to GDP ratios are particularly elevated in advanced economies. In 2007, prior to the global financial crisis, the average general government debt to GDP ratio in advanced economies was around 75%. By 2020, it had risen to 125%. Outside of the advanced economies, general government debt to GDP ratios also increased markedly over the same period, although to less elevated peaks. 

Looking at the world’s 10 largest economies, all except Germany have seen their public-debt to GDP ratios jump since the global financial crisis. In 2024, six of 10 are forecast to record general government debt to GDP ratios at or above 100%, with some — Japan, Italy, the United States, and France — well above that level. 

Many of these debt to GDP ratios are significantly lower when measured on a net basis, such as excluding debt owed by one part of government to another. In Japan, the difference is exceptionally large. Nonetheless, net debt to GDP ratios have also increased markedly since the global financial crisis in most of the world’s largest economies and they are generally very elevated. In the US, for example, federal debt held by the public was close to 100% of GDP in 2024, versus just 35% in 2007.

In 2007, the average general government deficit to GDP ratio across advanced economies was just 1%. For emerging economies, there was a slight surplus on average. Deficits in advanced and emerging economies soared during the GFC and COVID-19 pandemic and have generally remained elevated since. In 2025, we forecast an average general government deficit to GDP ratio in advanced economies of over 4%. For emerging economies, the forecast average exceeds 5%.

In the world’s 10 largest economies, the average general government deficit is projected to exceed 5% in 2025 for the sixth successive year. While deficits are generally forecast to remain high compared with the pre-pandemic years, many of the largest countries were also running rather large deficits back then. Germany is again a notable exception, along with Canada.

In our Top Ten Economic Insights for 2025, we highlighted the risk of increasing financial market concern over the poor state of the public finances in many of the world’s economies, including several of the largest. The first few weeks of the new year were indeed characterized by pronounced upward pressure on sovereign bond yields, led by the US. The fact that yields have been on an upward trend since 2024 at the same time as inflation and central bank policy rates have been trending downward is very unusual.

This break from the norm is partly due to sovereign yield curves having been unusually flat following the financial crises and COVID-19 pandemic relative to the level of central bank policy rates, as huge central bank asset purchase programs suppressed longer-term interest rates. Still, the post-pandemic combination of higher debt, deficits, and interest rates, with less favorable growth prospects and political impediments to fiscal consolidation, is an increasing source of risk.

Looking ahead, relative growth and interest rate prospects are becoming more problematic from the perspective of lowering debt ratios. Nominal growth prospects are likely to be constrained by structural headwinds, including poor demographics, and central bank inflation targeting regimes. At the same time, the multi-decade downward trend in sovereign yields has gone into reverse since the pandemic. This reflects various factors that are likely to persist, including the waning of disinflationary forces, higher equilibrium levels of central bank policy rates and the unwinding of their asset purchase programs, and higher term premia.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.