High Debt, Hard Choices

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Mounting public debt and rising interest rates are stretching public finances and forcing difficult fiscal decisions.
Fiscal trade-offs that were postponed under two decades of unusually low interest rates now require resolution as borrowing costs rise and demand for public funds grows.
Trust in government is identified as a key scarce resource needed to reconcile competing fiscal priorities.

Global public debt climbed to 93.9 percent of GDP in 2025 and is on track to breach 100 percent by 2028—levels never seen in peacetime.
Borrowing costs have doubled or tripled within a short span, increasing interest bills and crowding out other budget priorities.
Country examples and patterns:
- In the US, net interest payments climbed from about 2 percent of GDP before the pandemic to 4.2 percent in 2025—surpassing defense spending—and are set to rise further.
- In low-income countries, interest payments consume 21 percent of tax revenues on average.
Macro-financial risks and constraints:
- High debt reduces fiscal space to respond to shocks, raises the cost of capital, complicates monetary policymaking, and can motivate financial repression.
- Elevated debt increases the risk of sudden and sharp market-driven adjustments (Dornbusch’s insight invoked).
- Above certain thresholds, additional borrowing forces painful decisions—through austerity, inflation, financial repression, or default.

Size of government vs. revenue:
- Rising demands for social safety nets, health care, education, public investment, and risk protection clash with limited willingness to raise revenue.
- “Governments cannot provide Nordic-level benefits without Nordic-level taxation.”
Credibility vs. flexibility:
- Need for credible medium-term fiscal anchors with escape clauses for rare shocks; transparent plans that prioritize investment while protecting the vulnerable; institutional frameworks that build confidence without straitjacketing policy.
Invest now vs. conserve firepower:
- Choices to spend on national security, climate transition, resilience, and inclusion reduce buffers for future crises.
- Fiscal strategies should be robust to adverse surprises—“it pays to hold something back when the next crisis may be just around the corner.”
Political economy:
- Each budget decision has explicit winners, losers, and timing; postponing choices exacerbates future adjustment costs and complicates politics.

Debt as intergenerational issue:
- Persistent deficits are financed by debt that future workers and taxpayers must service; high debt shifts income toward creditors at the expense of public goods.
- Recent debt has often financed current consumption or avoidance of tough choices, transferring more burden to future taxpayers.
Demographics amplify pressures:
- Advanced economies now have about three workers per retiree, down from roughly four in 2000, and the number is heading toward two workers by 2050 (OECD 2025).
- Aging populations and off-balance-sheet pension and health obligations can surface with destabilizing force.
Policy choices for fairness:
- Options include raising taxes, lowering benefits, or continuing to borrow—each has distributional and political consequences.
- Delaying adjustment typically makes later adjustments more abrupt and onerous, with the bill falling on fewer people.

Evidence of trust deficit:
- A 2024 survey of 27,000 people in 13 countries shows widespread misunderstanding of basic fiscal issues.
- Only about 42 percent of respondents understood that raising taxes or cutting spending would reduce a government deficit.
- More than 60 percent underestimated their country’s debt-to-GDP level, especially in high-debt countries.
Trust and expectations:
- Respondents who report more trust in their government are 20 percent more likely to believe that its policies will help stabilize or reduce public debt.
- Those with greater trust are 17 percent more likely to expect a positive impact on their own welfare from debt-reduction policies.
Political economy dynamics:
- Fear of losing pensions or essential services and doubts about fair burden-sharing reduce public support for reforms.
- Past experiences with austerity, corruption, or misused stimulus funds erode confidence and fuel cynicism.
- Mistrust can create a vicious cycle: leaders postpone measures, debt worsens, and trust falls further.

Trust-building elements:
- Budget transparency and well-structured public financial management.
- Independent fiscal councils with clear mandates, real autonomy, and strong technical expertise (example: The Netherlands).
- Spending evaluations, tax expenditure reports, and impact assessments to clarify where money goes and what it delivers.
- Prudent management of the public wage bill and efficient procurement to reduce perceptions of waste.
- Reducing special tax regimes and pension privileges to enhance fairness.
- Strong oversight of state-owned enterprises to signal responsibility and competence.
Reform approach:
- Avoid indiscriminate austerity; pursue gradual, well-calibrated steps that place debt on a sustainable path while protecting investment and the vulnerable.
- Policymakers should be honest about trade-offs, prioritize investment, and design fiscal frameworks with credible anchors and transparent escape clauses.
- Building and sustaining trust is essential for persuading citizens to accept near-term sacrifices for longer-term stability.

Global public debt: 93.9 percent of GDP in 2025; on track to breach 100 percent by 2028.
US net interest payments: about 2 percent of GDP before the pandemic; 4.2 percent in 2025.
Interest payments in low-income countries: 21 percent of tax revenues on average.
Workers per retiree in advanced economies: about three now; roughly four in 2000; heading toward two by 2050 (OECD 2025).
Survey: 27,000 people in 13 countries (conducted in 2024).
Fiscal knowledge and perceptions from survey:
- About 42 percent understood that raising taxes or cutting spending would reduce a government deficit.
- More than 60 percent underestimated their country’s debt-to-GDP level.
- Respondents with more trust are 20 percent more likely to believe government policies will stabilize or reduce public debt.
- Respondents with greater trust are 17 percent more likely to expect a positive impact on their own welfare from debt-reduction policies.

Era Dabla‑Norris and Rodrigo Valdés, “High Debt, Hard Choices,” F&D Magazine, March 2026.

High Debt, Hard Choices
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