How Government Debt Became Central to Global Growth

A decade ago, deficit spending still came with a little shame. Finance ministers talked about discipline. Central bankers talked about exit strategies. Today, government borrowing shows up like a standing line item, no apology required. Growth is still happening, but much of it now comes with a Treasury seal on the envelope. Across continents, governments are spending first and asking questions later. Some of that spending makes sense. Some of it feels like kicking a can down a very long road. For accountants, auditors, and finance leaders, the numbers tell a story that headlines only hint at. This is less about stimulus and more about dependence.

The Global Picture

Global GDP is expected to grow about 2.7% in 2026, below both 2025 and the pre-pandemic average of 3.2%. That alone is not alarming. What matters is how that growth gets financed. Public debt levels across advanced and emerging economies keep climbing, even as unemployment stays low and interest rates sit well above their post 2008 norms. IMF data projects global public debt to exceed 100% of global GDP by 2029, the highest level since the late 1940s. Governments are leaning hard into deficit spending to support aging populations, military budgets, AI investment, energy transitions, and voter expectations. Taxes, for the most part, stay untouched. This is not an austerity. This is not a reform. This is a borrowing policy.

Source: The Wall Street Journal

Geopolitics now drives Budgets more than Economics

Debt is not rising in a vacuum. Geopolitics now sits at the center of fiscal policy.

Russia’s invasion of Ukraine triggered a sustained surge in military spending, and not just in Europe. Defense budgets expanded across NATO members, Asia-Pacific allies, and even traditionally neutral countries. These outlays are structural, not temporary. Tanks, missiles, and munitions do not sunset like tax provisions. Trade tensions also reshaped fiscal choices. The U.S. threat of escalating tariffs tied to Greenland negotiations rattled markets earlier this year before a temporary framework eased pressure on Europe. The episode served as a reminder that trade policy now doubles as foreign policy, with real budget consequences.

Source: Bloomberg

Canada’s spending push reflects the same shift. Faced with tariff risk and geopolitical uncertainty, Ottawa chose resilience over restraint, prioritizing ports, supply chains, and defense. Similar logic shows up across Europe and parts of Asia. These geopolitical commitments lock in spending long after the headlines fade. They also limit future flexibility. Defense budgets rarely shrink quietly.

North America leans harder on deficits to Fund Growth

The United States remains the anchor of the global system, and also its biggest stress test. The federal government now borrows roughly $7 billion a day. The deficit is approaching $2 trillion for the current fiscal year, with a primary deficit near 3.8% of GDP. That distinction matters. Primary deficits exclude interest costs. In plain terms, even before servicing past debt, the math does not work. The One Big Beautiful Bill Act adds pressure. According to the Committee for a Responsible Federal Budget, the bill could add $5.5 trillion to deficits over the next decade if its provisions get extended, which history suggests they will. The theory is that growth will fill the gap. The reality is that growth would need to sustain a real 3% annual pace for a decade just to stabilize the debt trajectory. The U.S. has not pulled that off consistently since the 1990s.

Meanwhile, interest costs doubled over the past four years. They now consume roughly 4% of GDP and more than 20 cents of every federal dollar spent. Bond markets have noticed. Long-term Treasury yields rose even as the Federal Reserve cut policy rates, a sign investors demand a higher risk premium. Canada tells a quieter but instructive story. Ottawa approved roughly CA$140 billion in new spending over five years, including defense, trade infrastructure, and industrial support aimed at reducing reliance on the U.S. The budget deficit is set to rise toward 2.5% of GDP. The spending reflects a strategic shift toward sovereignty and resilience, but it also adds to a growing global debt stack at a time when borrowing costs remain elevated.

For CPA firms, this shows up in client behavior. Higher borrowing costs affect valuations, capital plans, pension assumptions, and tax projections. This is not abstract. It hits engagement letters and boardroom conversations.

Europe abandons Fiscal Restraint amid Security Pressures

Europe faces a different version of the same problem. Growth is slower, political coalitions are fragile, and fiscal space is tighter. The euro area is expected to grow about 1.3% in 2026. Germany, once the model of restraint, now plans a trillion-euro defense and infrastructure package. France struggles to pass budgets without market pushback. Britain lost roughly 220,000 jobs since its late 2024 budget, while still running persistent deficits. Europe learned a hard lesson after the global financial crisis. Austerity eroded infrastructure, weakened militaries, and fueled political backlash. No one wants to repeat that. Even parties that once preached restraint now promise more spending, especially on pensions and social benefits.

Source: Bloomberg

The difference today is interest rates. Ten-year government bond yields across Europe remain elevated compared to the last decade. Servicing costs in Germany and France roughly doubled over four years. Investors have not fled, but patience is not unlimited. For multinational firms, this creates uneven risk. Tax policy stays high. Public services remain under strain. Regulatory complexity grows. It is manageable, but it is not cheap.

Asia stretches Balance Sheets to Sustain Momentum

Japan offers the clearest warning sign. Government debt exceeds 250% of GDP. For decades, low inflation and domestic savings masked the risk. That mask is slipping. In January, Japanese long-term bond yields hit record highs after the government floated tax cuts ahead of snap elections. The selloff required only about $280 million in trades to rattle a $7.2 trillion market. That should make anyone uncomfortable. The Bank of Japan held its policy rate at 0.75% while raising inflation forecasts. Underlying inflation now runs near 3% for fiscal 2025. The yen rallied sharply on speculation of intervention, showing how sensitive markets have become.

Source: Bloomberg

China’s picture looks different but carries its own stress points. Exports drove roughly a third of China’s growth in 2025, the highest share since 1997. Domestic consumption remains weak. Property investment posted its first annual decline on record. The government runs an aggregate deficit of nearly 9% of GDP for a second year in a row.

Source: Bloomberg

That export dependence works until it does not. Trade tensions eased somewhat in 2025, but higher tariffs and geopolitical risks loom in 2026. If external demand cools, Beijing’s policy options narrow quickly. India stands out as a relatively bright spot. Growth near 6.6% comes from consumption and public investment. The EU-India trade pact could eliminate up to €4 billion in tariffs, opening supply chains and capital flows. Even here, fiscal discipline remains a balancing act.

Source: Financial Times

Emerging Markets Juggle Debt Burdens

Emerging markets live closer to the edge. Debt levels rose sharply during the pandemic. Many countries now face high borrowing costs and limited policy room. Latin America provides a mixed picture. Exports reached record levels in 2025, driven by U.S. and Chinese demand. Brazil posted record tax revenues, giving President Lula more spending room ahead of elections. Mexico’s inflation cooled faster than expected, allowing rate stability. But these gains depend on external demand and commodity flows. A slowdown in advanced economies or renewed trade friction hits fast.

Source: Bloomberg

Africa shows moderate growth near 4%, but high debt burdens and climate shocks pose real risks. Zimbabwe’s inflation dropping to 4.1% marks a milestone, but its history reminds everyone how fragile monetary credibility can be. A gold-backed currency works only as long as reserves and discipline hold. For firms operating in these regions, cash management, currency exposure, and counterparty risk matter more than growth forecasts

What rising Public Debt means for Professionals

This global turn toward deficit-driven growth changes the risk map.

• First, interest expense becomes a structural budget item, not a cyclical one. That crowds out productive investment over time. Governments borrow more to service old debt, not just to build new assets.
• Second, nonbank financial institutions play a bigger role in sovereign debt markets. Hedge funds, money market funds, and insurers now hold roughly half of global financial assets. These players use leverage and short-term funding. If stress hits, central banks likely step in again. Moral hazard creeps in quietly.
• Third, inflation dynamics stay uneven. Headline inflation slows globally toward 3.1% in 2026, but price levels remain high. Households feel it. Wage pressure lingers. Policy makers walk a narrow line between easing too soon and tightening too late.
• Fourth, growth quality matters more than growth rate. A 3% GDP print funded by borrowing looks good until the interest bill arrives. Productivity-driven growth looks slower but lasts longer. Right now, many governments choose the fast route.

Takeaway

This is not an imminent crisis. It is something more subtle. A system that works until it does not. Governments discovered during the pandemic that markets tolerate big deficits longer than expected. That lesson stuck. The bill just keeps growing. At some point, investors ask harder questions. They always do. For accounting and finance professionals, the signal is clear. Watch debt service costs, not just headline deficits. Pay attention to primary balances. Stress test assumptions around rates and growth. Question rosy projections tied to technology or trade deals. As John Maynard Keynes once wrote, the difficulty lies not in the new ideas but in escaping the old ones. The old idea here is that growth alone fixes everything. The math says otherwise. Borrowing can buy time. It cannot buy discipline.