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What changed? Four things, in rapid succession. First, the rate shock: policy rates rose 400–500 basis points across the advanced world in 2022–23, and every bond that matures must now be refinanced at a multiple of its original coupon.
This created a stock-to-flow problem that compounds year after year. Second, the relationship between interest rates and growth reversed. For a decade, real rates sat below real growth in virtually all advanced economies, making debt dynamics self-correcting. In recent years, real interest rates have risen toward real growth rates in the United States, the United Kingdom and most of Europe, creating a less favourable environment for debt sustainability.
Third, the burden has become visible in budgets: US net interest payments have reached roughly 16% of federal revenue, the highest since the 1990s. Fourth, and most troubling, the fiscal response across democracies has been close to zero. Primary deficits remain large, and consolidation plans lack credibility.
The analytical core of debt sustainability is disarmingly simple. Public debt is deemed sustainable over the long run when the primary surplus (the budget balance excluding interest payments) is at least equal to the gap between the real interest rate (r) and real GDP growth (g), multiplied by the debt ratio. The intuition dates back to Evsey Domar's 1944 condition: public finances are stable so long as nominal interest rates remain below nominal GDP growth, because the economy, and hence government revenue, outgrows the debt service.
From 2010 to 2021, this condition was comfortably satisfied. With r below g almost everywhere, even governments running modest primary deficits saw their debt ratios fall. Central banks reinforced the dynamic by absorbing vast quantities of government bonds. French macroeconomist Olivier Blanchard's 2019 presidential address to the American Economic Association captured the zeitgeist: when r < g, debt accumulation may carry no fiscal cost. Politicians took the hint and borrowed.
Since 2022, the regime has shifted. With r now close to g in the US, the UK and much of the eurozone, a 1% primary deficit adds roughly 1.2–1.5 percentage points to the debt ratio each year. Interest costs on new issuance run three to five times pre-2022 levels, and there is no quantitative easing backstop: markets must clear at market rates. The implications are stark. The United States would need a primary surplus of around 3% of GDP to stabilise its debt; it is running a deficit of roughly 4%. The Congressional Budget Office's projections leave little to the imagination: the deficit reaches $1.9 trillion in fiscal 2026, rising to $3.1 trillion by 2036, with debt held by the public climbing from 101% of GDP to 120% by 2036 and to 175% over two decades. Rising net interest costs, not primary spending, drive most of that deterioration.
If the math is so unforgiving, why have debt ratios not yet exploded? The answer lies in what might be called the nominal illusion. Nominal public debt is rising rapidly in every major developed economy, but as long as nominal GDP growth remains strong, the debt-to-GDP ratio can hold steady or even decline. The post-pandemic inflation burst, paradoxically, flattered the ratios even though absolute debt levels were exploding: strong nominal GDP growth initially absorbed the ongoing very large deficits.
The illusion is comfortable, until it breaks. Greece offers the textbook case. For over a decade before 2008, Greek debt appeared under control because robust nominal growth offset persistent deficits. When the global financial crisis hit, nominal growth collapsed, deficits widened, and the debt ratio soared in a classic sudden stop.
The United States is not Greece. The dollar's reserve status is a powerful stabiliser. But US nominal growth, while still robust, is already normalising while deficits are not. The uncomfortable question is how long the dollar privilege can keep the bond market patient.
Italy, meanwhile, is the outlier that proves the rule. Italy has run primary surpluses for much of the past thirty years, forced into fiscal discipline by public debt already at the boundaries of sustainability. Yet its debt remains above 140% of GDP because of persistently high interest costs.
The rest of the G7 has not adjusted at all: the US, UK, France and Japan continue to run primary deficits of 3–5% of GDP, shielded from market pressure by reserve-currency privilege, the ECB backstop, or the perpetual promise of medium-term consolidation. History suggests that meaningful fiscal adjustment in developed markets comes only under market duress, as in 1990s Italy or the European periphery in 2010–12, when financing pressures forced rapid consolidation. Without that forcing function, the path of least resistance is drift.
Economics identifies the required adjustment; politics determines whether it happens. The IMF estimates that most G7 countries need a fiscal adjustment of 3–4% of GDP over the coming decade to stabilise debt. This would require an effort without peacetime precedent among the large modern democracies. The obstacles are structural rather than cyclical.
Ageing demographics push pension and healthcare costs relentlessly upward; these items account for 40–60% of primary spending in most G7 countries and are politically untouchable. Defence spending is resurgent, with NATO's 2% of GDP target now a floor and Europe adding a further half to one percentage point of GDP in largely non-discretionary, multi-year commitments. Climate investment adds another claim on public resources, with the IEA estimating that more than $4 trillion per year in clean-energy investment is required globally. On the revenue side, tax-to-GDP ratios are near historical highs in a number of economies, and further increases face limits from base erosion, capital mobility and electoral resistance. Layered on top is political fragmentation: coalition governments and short electoral cycles compress fiscal planning horizons. Italy has had fourteen governments since 2000, and France lost its parliamentary majority in 2024.
The intellectual climate compounded the problem. Blanchard's "no fiscal cost" framework, and the broader fashion for Modern Monetary Theory, provided cover for a decade of fiscal expansion. With r now close to or above g, that cover has been withdrawn, but fiscal frameworks have not caught up. When market discipline does arrive, it tends to do so abruptly and violently. The eurozone crisis of 2011–12 forced a sharp and painful adjustment in the periphery through widening spreads and forced fiscal consolidation, while the UK gilt crisis in September 2022 escalated within days from a political announcement into a near-systemic event, before the Bank of England intervened. 