Rising Global Debt Tide

On July 4, the US enacted the One, Big, Beautiful Bill Act, a sweeping legislative package that reforms the tax code, trims the funding of certain federal programs and raises the debt ceiling by $5 trillion. While passing a budget through regular order may offer some reassurance to investors, the broader fiscal outlook remains troubling.

The underlying trends are concerning: tax revenues are declining relative to Gross Domestic Product (GDP), government spending continues to increase and there is little political momentum to address the growing fiscal gap. Furthermore, net interest payments make up a growing share of US government spending, an end of the era when negative real interest rates paid on government debt made the burden more manageable. According to the nonpartisan Congressional Budget Office, the new legislation is projected to add over $3 trillion to the national deficit over the next decade. This likely locks in annual deficits of 6% to 7% of GDP in coming years–roughly double the post-World War II average–and pushes the national debt toward historic highs.

However, the US is not alone in facing these fiscal pressures. High deficits and rising debt burdens are becoming a shared challenge across both advanced and emerging economies. The world’s other major economies—including Europe, Japan and China—are each grappling with their own unsustainable trends and policy dilemmas.

In Europe, the post-Cold War model of maintaining fiscal space by minimizing defense spending under the US security umbrella—while relying on inexpensive Russian energy and Chinese imports—has been upended by geopolitics. As we discussed in our previous Macro Minute, Teutonic Shifts, Germany is re-thinking its post-Cold War fiscal stance and relaxing its constitutional debt brake to increase defense spending. Thanks to decades of fiscal discipline, Germany has a strong starting point, with headroom to grow its debt relative to its peers. France also plans to boost defense outlays, but its weaker fiscal position and fragmented political landscape pose challenges. Despite having the second-highest debt burden in our chart’s sample, Italy shows signs of improvement beneath the surface, including a primary budget surplus, reduced dependence on foreign investors and a more stable political climate.

Japan remains the most indebted major economy in terms of debt-to-GDP ratio. Its aging population and massive public debt represent a growing strain on future generations. Although most of the debt is domestically held, servicing it requires a significant transfer of resources from younger to older citizens—a burden that will intensify as the population shrinks and the Bank of Japan (BOJ) gradually normalizes interest rates.

Meanwhile, China is navigating a difficult economic transition. Its growth model has shifted from export-driven expansion to a precarious mix of real estate stimulus and fiscal support, all while demographic trends continue to worsen. The International Monetary Fund (IMF) projects that China will run deficits of around 8% of GDP for the remainder of the decade to keep its economy on track.

The broader takeaway is clear: while the US fiscal trajectory is troubling, it reflects a broader global pattern. Aging populations, geopolitical shifts and economic transitions are placing increasing pressure on public finances worldwide. As borrowing needs rise across the globe, so will the volume of marketable debt and the demand for investors willing to absorb it.