In its latest report on global debt, the Organisation for Economic Co-operation and Development has projected a surge in government borrowing, reaching an unprecedented $15.8 trillion this year.

The Paris-based research body revealed that gross borrowing, encompassing both refinancing of maturing bonds and new issuances, climbed from $12.1 trillion in 2022 to $14.1 trillion in 2023.

This substantial increase in borrowing is attributed to the ongoing economic repercussions of the COVID-19 pandemic, which prompted governments worldwide to embark on massive borrowing to support households and businesses.

The OECD noted that the total borrowing is expected to surpass the previous peak of $15.4 trillion recorded in 2020.

A significant portion of this year’s borrowing, approximately $12.6 trillion, will be directed towards refinancing maturing bonds issued during the pandemic.

However, the surge in inflation post-pandemic has led to higher interest rates, causing the average cost of new borrowing for governments to spike to 4% in 2023 from 1% in 2021.

Economic output

Consequently, the cost of interest payments for governments has escalated, accounting for 2.9% of annual economic output in 2023 compared to 2.3% in 2021.

The OECD warned that this trend is expected to continue, projecting a further half-percentage-point increase in interest payment costs by 2026.

Moreover, governments are anticipated to encounter challenges in finding buyers for their debt as central banks begin to reduce their holdings of government bonds, which were amassed in efforts to stimulate growth and inflation following the global financial crisis.

With central banks gradually withdrawing from the bond market, the OECD highlighted the need for governments to attract more price-sensitive investors, such as non-bank financial sectors and households.

The report supported that central banks in OECD member countries currently hold government bonds equivalent to 30% of annual economic output, mirroring the surge in total government debt since the financial crisis.

The OECD anticipates a record level of net bond supply to be absorbed by the broader market as central banks embark on quantitative tightening.