By 2036, the U.S. will spend 18% of its budget on debt interest payments. How refinancing amid high rates is constraining policy space in developed economies.
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By 2036, roughly 18% of all U.S. federal spending could go toward servicing the national debt. According to estimates from the Congressional Budget Office (CBO), net interest expenses will reach $2.1 trillion compared to approximately $1 trillion in 2026.Over ten years, debt servicing costs could double—and this isn't about new government programs, but rather payments on obligations already accumulated.
This is the new challenge facing advanced economies. Governments accumulated substantial debt during a period of low interest rates, and are now gradually refinancing it in an environment of expensive money. Old cheap bonds are maturing and being replaced with new ones carrying higher yields. As a result, the consequences of monetary tightening hit budgets with a lag, but then become a permanent line item in spending.
Debt burden depends on several factors at once: the volume of accumulated obligations, the cost of new borrowing, and the pace of economic growth. When debt servicing costs exceed nominal GDP growth and the budget maintains a deficit, the debt burden begins to increase almost on its own. Governments must allocate more and more resources to past obligations, leaving less room for new spending—whether on defense, social programs, infrastructure, or tax cuts.
The scale of accumulated obligations is already difficult to view as a temporary phenomenon. Global government debt surpassed $100 trillion back in 2024—around 93% of world GDP. According to IMF estimates, by the end of the decade the figure could approach 100% of GDP, and in an adverse scenario reach 115% within just three years.
For OECD countries, the problem is compounded by the scale of refinancing. In 2026, governments plan to borrow around $18 trillion versus $12 trillion in 2022—an increase of roughly 50%. Of this amount, about 78%, or approximately $14.5 trillion, will be needed to repay and replace existing debt. Just four years ago, refinancing accounted for around $12 trillion. Average interest expenses in OECD countries reached 3.3% of GDP in 2025 versus 1.9% in 2020. In the United Kingdom, for comparison, debt servicing already consumes about 8.3% of all government spending, or roughly 9% of budget revenues.
The United States clearly illustrates how high rates gradually transform into an additional burden on the budget. In 2020, the Fed funds rate stood at 0–0.25%; today it's 4.25–4.50%. Meanwhile, government debt over these years has grown from $21 trillion to $32.1 trillion (more than 50%), meaning more and more new borrowing must now be placed at higher cost. The first expensive issues barely change the overall picture, since it still contains a large volume of old cheap bonds. But as these mature and are replaced with new issues, the impact of high rates becomes increasingly noticeable, and the average cost of debt servicing rises.
The debt market is changing
The structure of the market where governments borrow money is also changing. After the 2008 financial crisis, major central banks began using quantitative easing—large-scale bond purchases to lower long-term rates and support the economy. The Fed conducted such programs from 2008–2014, the Bank of England from 2009, and the ECB began large-scale purchases of eurozone country bonds in 2015. During the 2020 pandemic, these same tools were sharply expanded again, as central banks simultaneously supported financial markets and the economy. The Fed, for example, ramped up purchases of Treasury bonds and mortgage-backed securities, while the Bank of England bought British government bonds.
Now the situation is reversed: central banks are shrinking their portfolios. The OECD notes that the surge in government debt issuance has coincided with central banks unwinding their balance sheets, meaning the private market must absorb a larger volume of bonds.
This matters for budgets for two reasons. First, private investors are far more sensitive to yield and risk. Second, governments compete with corporations for capital. When companies offer investors attractive returns, governments must factor this in when placing their own securities. The greater the simultaneous financing needs of both government and business, the higher the cost of long-term money.
Yields are also influenced by inflation expectations. An investor buying a ten-year bond needs to understand what they'll receive in real terms several years out. If inflation is perceived as persistently high, required yields rise. The market may also price in an additional premium for fiscal uncertainty: if investors doubt a government's ability to control its deficit, they demand higher compensation for risk.
That's why government bond yields increasingly depend on how much the state plans to borrow, who will buy that debt, how fast the economy is growing, and how credible fiscal policy appears.
This is especially evident in countries where political crises overlap with high debt. In the UK, markets reacted sharply to the 2022 budget crisis under Liz Truss's government. In France, after snap elections in 2024, no political force secured a parliamentary majority, and Michel Barnier's government fell in December that year following a no-confidence vote, unable to pass a budget. In Italy, political fragmentation and frequent coalition changes complicate fiscal policymaking and heighten market sensitivity to government decisions.
According to Allianz estimates, since the end of quantitative easing in 2022, political instability has added roughly €98 billion in interest expenses for the UK, Italy, France, Spain, and Belgium. The UK and Italy each accounted for €41 billion, Spain for €14 billion, and France for €11 billion.
US: Even reserve currency status doesn't override the math
The United States remains a special case. The country borrows in dollars, which serve as the primary reserve currency, and US Treasuries retain their status as the key safe-haven asset. This gives Washington far more room than most other governments.
But financial advantage doesn't override arithmetic. According to CBO projections, net interest expenses in the US federal budget will reach approximately $1 trillion in 2026 and climb to $2.1 trillion by 2036. Their share of the economy will grow from 3.3% to 4.6% of GDP. US government debt is projected to increase from 99% of GDP in 2025 to 120% of GDP in 2036.
Even a country with a unique position in global financial markets faces a choice between past and future. The more money directed toward interest, the fewer resources remain for new programs without raising taxes or additional borrowing.
According to CBO's long-term estimates, interest expenses could become the largest item in the federal budget, surpassing Social Security spending in 2047. Such a projection doesn't signal a crisis in American finances on a specific date—it shows something else: if the current trajectory continues, debt servicing will gradually become one of the main constraints on federal fiscal policy.
UK: Interest payments already competing with spending
In the UK, the problem appears less severe in absolute terms but more pronounced in the current budget. According to the Office for Budget Responsibility's forecast, debt servicing costs will reach £110 billion in the 2025–2026 fiscal year and rise to £137 billion by 2030–2031. As a share of GDP, that's 3.6% and 3.8% respectively.
Around £110 billion represents roughly 9% of non-tax budget revenues. Interest expenses are already more than double their pre-pandemic share of GDP and have become the third-largest category of government spending after healthcare and social benefits.
For the budget, this is fundamentally different from a typical increase in the cost of an individual government program. The government could theoretically abandon, cut, or postpone funding for healthcare or infrastructure. Interest on already-issued bonds cannot simply be canceled. It becomes an obligation that must be met regardless of whatever policy priorities the next government may have.
France: The Price of Political Uncertainty
The French example shows how the political situation can directly affect borrowing costs. After snap parliamentary elections in summer 2024, no political force secured a majority in the National Assembly. Michel Barnier's government had to seek opposition support to pass the 2025 budget, but in December it failed to get it through and fell after a vote of no confidence. A new budget was only adopted in February 2025 under François Bayrou's government.
For investors, the problem was that the political deadlock cast doubt on deficit reduction plans. In 2025, France's deficit reached 5.1% of GDP, while public debt hit 115.6% of GDP. Against the backdrop of the budget crisis, the yield spread between 10-year French and German bonds reached 88 basis points in December before Barnier's government fell. The higher this premium, the more expensive new borrowing becomes for France.
It creates a vicious circle. The government needs to reduce the deficit, but that requires unpopular measures—raising taxes and cutting spending. Without a stable majority, implementing them becomes harder, while political uncertainty increases the premium investors demand for French debt. More expensive borrowing, in turn, increases interest expenses and complicates further deficit reduction. The IMF estimates that a 1 percentage point rise in interest rates could increase France's debt burden by approximately 0.1% of GDP in the first year, 0.5% after five years, and 0.9% after ten years.
Governments Will Have to Choose
Developed countries have several ways to reduce debt pressure, but each comes with its own cost. The most comfortable option is to accelerate economic growth. If productivity, employment, and the tax base grow faster than borrowing volumes, the debt-to-GDP ratio can decline without drastic spending cuts. The problem is that such a scenario cannot be guaranteed through budget decisions: the effects of investment and structural reforms appear slowly.
The second path is raising tax revenues. This improves the primary balance more quickly but reduces disposable income for households and companies and may put additional pressure on economic activity. The third option is cutting spending. From a budget arithmetic standpoint, this is the most direct route, but it's also the one that most quickly encounters political resistance and risks weakening demand.
There's also a less obvious option—financial repression, where the state creates conditions under which domestic financial institutions hold a larger share of government bonds. This can support demand for debt and contain its cost, but simultaneously distorts the capital market and shifts part of the burden onto savers, pension systems, and other domestic investors.
The main risk for developed economies isn't necessarily a sudden sovereign default. Far more likely is a gradual narrowing of policy space. An increasing share of budget revenues is automatically directed toward servicing obligations accumulated in previous years. When a new crisis emerges—military, energy, banking, or social—the government has to find money within an already overburdened budget.
