The world is saddling children with debt at a record pace

Andreas Cervenka

This is a commentary piece. The analysis and views expressed are the author’s own.

Published at 09:38

The world’s major economies are heading toward their largest budget deficits since the pandemic, warns the International Monetary Fund (IMF), which is calling for “urgent action.”

The question is whether anyone is listening.

Public finances share some similarities with the climate issue. In both cases, experts have warned for decades that things could go wrong if the world continues on its current path. Yet, relatively little is done, and the problem continues to grow.

Taking action can feel burdensome in the moment, making it tempting to put everything off until tomorrow—like a teenager refusing to clean their room, saying, “I’ll do it later.”

Many middle-aged decision-makers seem to reason much the same way regarding both the climate and rising debt.

The result is that the truly painful consequences will only emerge later, landing squarely in the laps of children and grandchildren.

Just as with the climate, there are those who dismiss concerns about debt as nonsense.

After all, years of deficits and ever-rising national debt have not yet led to any major catastrophes in the West. 

That is true—but only if one chooses to block out the Eurozone crisis of 2011 and 2012, when several countries threatened to bring down the euro and, by extension, the entire EU. 

It is somewhat reminiscent of climate change deniers who point to a single cold winter or cool summer and triumphantly declare that they were right all along.

One could also point out that debt as a share of the economy has actually fallen since its 2021 peak. However, the explanation for this is not some newfound frugality, but rather inflation. Debt is typically measured in relation to a country’s gross domestic product (GDP).

When prices rise rapidly, GDP also increases; since debt does not automatically grow in the same way, it appears to be shrinking—even though, in absolute monetary terms, it is actually rising.

Inflation is a classic way to "get rid" of debt, and historically, this has often been achieved simply by countries printing more money—which is exactly what happened during the pandemic.

However, this method has a very clear downside: inflation makes ordinary people poorer and often leads to political turmoil—something witnessed on both sides of the Atlantic in recent years.

Now, national debt levels  are rising rapidly again, heading back toward the record highs of 2021 relative to GDP. In dollar terms, the increase is staggering: rising from $74 trillion in 2019 to $111 trillion by the end of 2025, according to the IMF.

That equates to approximately 130,000 kronor for every person on Earth.

We are approaching a point where it will become increasingly difficult to pretend nothing is happening. With the climate, that shift has already occurred, driven by the extreme weather and wildfires of recent years. And regarding debt, we may have reached a critical juncture this year, as interest rates in the US, Japan, and Europe have climbed to their highest levels in 20 to 30 years.

There are no signs of borrowing slowing down—quite the opposite. Ahead of its annual meeting this week, the IMF warns that budget deficits in major global economies will exceed 5 percent of GDP this year, the highest figure since the pandemic year of 2021.

However, while the economy was in freefall back then as the world shut down, growth has since chugged along reasonably well, despite crises such as the war in Iran. The IMF projects global economic growth of 3.1 percent in 2026 and 3.4 percent in 2027.

Despite this, major economies are running massive deficits, led by the US and China. Government budgets in France, Germany, and the UK are also deep in the red.

There are several reasons for this: increased military spending, but also sluggish growth, an aging population, and rising costs for welfare systems. Interest payments, too, are becoming an increasingly heavy burden—particularly in the US.

Last year, developed economies spent more on interest payments for their debt than on defense. Interest costs also consumed more funds than the global investment in AI and the green transition.

According to the IMF, global public sector debt is on track to reach 100 percent of GDP by the end of the 2020s—a level not seen since World War II. Countries such as the US, France, Japan, and the UK have already surpassed that mark. Politicians around the world are facing pressure from multiple directions simultaneously. Higher interest costs leave less room in the budget for other priorities, forcing difficult choices.

This, in turn, breeds voter discontent and makes it harder to push measures through the political process.

Investors become more skeptical, interest rates rise further, and a country can find itself in a vicious cycle. France appears to be in roughly this situation.

On paper, however, debt is a far easier problem to solve than the climate crisis.

One person’s debt is another’s asset. A large share of the money lent to governments consists of ordinary people’s pension savings. There is a shared interest in avoiding a crisis.

And while many countries are heavily indebted, the world is awash with money. Total global wealth has never been higher.

The only question is how that wealth should be distributed.

The severity of the Western world’s debt problem is open to debate.

But as the renowned economist Herbert Stein used to say: "If something cannot go on forever, it will stop."

One thing is certain, however: the longer action is delayed, the more painful the consequences will be later on.

In many countries, there is an imminent risk that today’s young people will not receive education, healthcare, or pensions anywhere near as good as those of previous generations.

A form of youth revolt has already emerged in many places—most recently in France. This may be just the beginning.