G7 debt piles and borrowing costs hit multi-decade highs
G7 government debt and borrowing costs are at multi-decade highs, driven by inflation, wars, and climate spending.
Government debt across the Group of Seven (G7) advanced economies is under intense pressure, with borrowing costs at levels not seen in years. The United States has crossed the $40 trillion debt mark for the first time, highlighting the challenge of funding rising demands from ageing populations, defence, and climate change.
Long-term bond yields have climbed sharply since the pandemic and Russia's invasion of Ukraine, as central banks hiked rates to fight inflation. Investors now demand higher returns to hold government debt, adding to the strain. The surge in borrowing by AI 'hyperscalers' has further tightened conditions, as buyers seek better compensation for absorbing a flood of new bonds.
The gap between short- and long-dated yields has widened, making longer-term borrowing more expensive. Governments have responded by issuing shorter-dated bonds, but this carries its own risk: refinancing needs come sooner, so any rise in yields feeds quickly into interest costs.
Debt levels across the G7 are now roughly equal to or above economic output, with the exception of Germany. Japan remains the most indebted, with debt more than double its GDP. Even Germany, once a champion of austerity, is increasing borrowing, citing the need for massive defence investment in response to Russian aggression.
Interest payments are rising as a share of output across most G7 countries, particularly in the United States. Across the OECD, interest payments already exceeded defence spending in 2024. The term premium on U.S. Treasuries — a measure of the compensation investors demand for holding longer-term bonds — has risen since the pandemic, reflecting concerns about fiscal policy, inflation uncertainty, and communication under the new Federal Reserve chair.
There are some bright spots. The risk premium on Italian bonds has fallen to its lowest since 2008, helped by political stability and a lower budget deficit. France, however, has seen investor risk rise amid political fragmentation since a shock 2024 election, with an independent report warning of a sharp deterioration in public finances unless spending is curbed.
Japan's 10-year bond yield is approaching 3% for the first time since the mid-1990s, as inflation and fiscal concerns reshape a market long defined by low rates. The government has trimmed longer-dated bond sales to stabilise demand, but borrowing costs face upward pressure. If more attractive yields lure Japanese money home, a key pillar of U.S. and European debt markets could weaken.