Government debt has become one of the most important challenges facing public finances globally. Governments have increased borrowing to respond to economic shocks, finance public services, support investment and address rising spending pressures. However, higher debt also creates future obligations through interest payments and principal repayments.
The central question is therefore not simply how much governments owe, but who ultimately bears the cost of servicing that debt.
According to the International Monetary Fund (IMF), global public debt rose to just under 94% of GDP in 2025 and is projected to reach 100% of GDP by 2029. The IMF identifies rising spending pressures, including social needs, defence and strategic priorities, alongside increasing interest burdens, as important contributors to fiscal pressure.
Governments Do Not Repay Debt in One Simple Way
Government debt is generally financed through borrowing in financial markets. Governments issue bonds and other securities that are purchased by investors, including banks, pension funds, insurance companies, investment funds and other institutions.
When these securities mature, governments typically refinance part of the outstanding debt by issuing new debt rather than repaying the entire amount from current tax revenues. This means that government debt can remain outstanding for extended periods. However, refinancing does not eliminate the economic cost. Governments must continue to make interest payments, and the cost of refinancing can increase when market interest rates rise.
The OECD expects governments and corporations to borrow approximately $29 trillion from markets in 2026, representing a 17% increase compared with 2024. The organisation also notes that sovereign borrowing costs remain elevated.
Taxpayers Are One Source of the Cost
One of the most direct ways governments service debt is through tax revenue. When a larger share of government revenue is allocated to interest payments, fewer resources may be available for other areas of public spending unless governments increase revenues, reduce expenditure or increase borrowing further.
This does not mean that higher government debt automatically results in higher taxes. Governments can finance their obligations through a combination of taxation, expenditure adjustments, economic growth and further borrowing.
However, persistent increases in debt interest payments can reduce fiscal flexibility. Governments may have less room to respond to future economic downturns or unexpected spending requirements without increasing borrowing or making difficult policy choices.
The IMF estimates that global interest expenditure has increased from around 2% to nearly 3% of GDP in only four years. It also notes that borrowing costs remain above pre-pandemic levels and that governments are refinancing maturing debt at higher market rates.
Bond Investors Also Play an Important Role
Government debt is not simply a liability for taxpayers; it is also an asset for investors. When governments issue bonds, investors provide capital in exchange for contractual interest payments and repayment of principal according to the terms of the securities. This means that government interest payments ultimately become income for holders of government debt.
The distribution of this income depends on who owns the securities. Pension funds, insurance companies, banks, investment funds and other financial institutions can hold government bonds, meaning that part of government interest expenditure can ultimately become income for savers and investors.
The OECD has highlighted changes in the investor base for sovereign debt, including a growing role for more price-sensitive and leveraged investors. It notes that these developments can affect the resilience and functioning of government bond markets.
Inflation Can Change the Burden
Inflation also affects the real economic burden of government debt. Higher inflation can reduce the real value of fixed-rate debt because future repayments are made in currency with lower purchasing power. However, the impact depends on the structure of government debt.
Inflation can also increase government expenditure and influence interest rates. Where government borrowing costs rise, refinancing maturing debt can become more expensive.
For this reason, the relationship between inflation, interest rates and government debt is important for fiscal sustainability.
The IMF has noted that the favourable combination of relatively low real interest rates and economic growth that previously supported public finances is becoming less favourable.
Economic Growth Can Help Manage Debt
Economic growth is another important factor in determining whether rising government debt becomes more difficult to manage. If an economy grows faster than its debt burden, the ratio of debt to GDP can stabilise or decline even when the nominal amount of debt continues to increase. Conversely, weak economic growth can make debt sustainability more difficult, particularly when interest rates are elevated.
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This relationship means that government debt cannot be assessed solely by looking at the absolute amount of borrowing. Investors and policymakers also consider debt relative to the size of the economy, borrowing costs, fiscal deficits and the government’s ability to generate future revenues.
The OECD defines government debt relative to GDP as an important indicator of the sustainability of government finances.
The UK Example
The United Kingdom illustrates how rising debt can translate into significant interest costs.
The UK Office for Budget Responsibility (OBR) forecasts underlying public sector net debt, excluding the Bank of England, to rise from around 90.5% of GDP in 2026 to approximately 94.5% of GDP before stabilising. The OBR also highlights persistent borrowing pressures and the difficulty of reducing debt as a share of GDP.
Debt interest is already a significant component of UK public expenditure. The OBR’s forecasts show that changes in interest-rate expectations can materially affect projected debt-interest costs.
This demonstrates why the cost of government borrowing depends not only on the amount of debt outstanding but also on the interest rates at which governments refinance their liabilities.
So, Who Ultimately Pays?
There is no single answer.
The cost of government debt can ultimately be distributed across taxpayers, public-service users, consumers, workers, savers and future generations, depending on how governments respond to higher debt and interest costs.
Taxpayers may face higher taxes. Public-service users may face reduced government spending or slower growth in services. Consumers and workers can be affected indirectly through inflation and economic conditions. At the same time, savers and investors holding government bonds can receive interest income.
Future generations can also inherit the consequences of today’s fiscal decisions, particularly if high debt limits the ability of future governments to respond to economic shocks or finance new priorities.
The distribution therefore depends on policy choices, economic growth, interest rates and the structure of government finances.
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Conclusion
Rising government debt does not mean that taxpayers will simply receive a bill for the entire amount outstanding. Sovereign debt is continuously managed through taxation, refinancing, economic growth and expenditure decisions.
The more important issue is the cost of servicing that debt.
With global public debt approaching 94% of GDP and projected by the IMF to reach 100% by 2029, while borrowing costs remain elevated, debt interest is becoming an increasingly important component of fiscal policy.
Ultimately, the burden of government debt is shared across the economy. The key question for policymakers and investors is whether economic growth and public revenues can remain strong enough to service existing obligations without placing excessive pressure on future taxation, public spending or financial stability.
Also read: How Rising Interest Rates Force a Choice Between Debt Servicing and Human Capital