Why is government debt so high, and does it matter?

What’s driving government debt and what does it mean for investors?

Government debt has been running high in many countries. What’s driving that and what does it mean for investors? 

Government debt is sometimes known as sovereign, public or national debt. It’s created when governments issue bonds to raise funds to support things like infrastructure projects or to drive spending.

What’s behind the high debt levels?

The high government debt levels we’ve seen recently in developed economies such as the UK and the US have largely been driven by a series of economic shocks. The global financial crisis and then the pandemic, for example, saw government spending rise to unprecedented levels, while lacklustre economic growth has seen the ratio of debt to GDP (gross domestic product) remain stubbornly high. We can see this in the data for 2023 provided by the World Bank¹: 

But while these spikes in debt levels could be attributed to events, longer-term trends could contribute to persistent levels of higher debt. These trends include the need to support an ageing population at the same time as the labour force is declining and tax receipts are falling, the need to maintain and upgrade failing infrastructure, the challenges and risks of climate change, and the need to shift to a low-carbon, sustainable economy, as well as increased defence spending.

Where will debt levels go next?

Based on current policy, economic and demographic forecasts, and budgetary analysis, the Congressional Budget Office in the US predicts that government debt will be 156% of GDP in 2055². It bases this estimate on slower economic growth and a shrinking population lowering revenues while spending increases.  

In the UK, the Office for Budget Responsibility (OBR) meanwhile, forecasts that government debt levels could reach over 270% of GDP by the mid-2070s³.

Can anything be done?

Potential solutions to the challenge of rising debt levels have been suggested. Each has its own pros and cons. 

• Increase investment – some believe that taking a short-term hit and increasing debt levels to invest to get the economy going could help to bring debt levels down in the long run. Whether investing for growth would contribute to cutting debt levels by a significant amount would depend on the return on investment being much higher than the costs of servicing that debt. 
• Change expectations of the State – from education to health and social care, shifting people’s perceptions of what the State provides could reduce public spending levels, but it’s a tough political and social challenge for any governing party to take on. 
• Boost productivity – increasing productivity can boost economic growth and tax revenues, which can lead to debt being repaid more quickly and less need for additional borrowing. That growth can also support investment in public services and infrastructure, creating a virtuous circle. The OBR, for example, estimates that every 0.1% increase in productivity growth could reduce the rise in debt to GDP by 25 percentage points⁴. However, productivity in the UK especially remains stubbornly low.

Is high government debt necessarily a problem?

It really depends on a number of factors and your perspective.  

In the US, for example, a debt ceiling – the maximum amount of debt that the Department of the Treasury can issue – is set by law. That debt ceiling was suspended in June 2023 until January 2025 when the ceiling of $36.1trn was reinstated⁵. That limit has now been reached, and the US Treasury has been using extraordinary measures to continue to borrow above it in the short term. But that can’t continue. 

If the debt ceiling isn’t raised or suspended, it could delay payments for government activities, lead to the government defaulting on its debt obligations, or both. In recent years, decisions on raising or suspending the debt ceiling have often gone to the wire, which has caused some market concern. 

In the UK, when the Labour government took office, it set non-negotiable fiscal rules. These were: 

• The current budget must be balanced, with day-to-day costs met by revenues. 
• Debt must be falling by 2029/30. 

With inflation and interest rates higher in recent months, governments can find themselves spending more on debt servicing, and less on chipping away at the debt overall. This means they can have less to spend on other public services.  

In a low-growth environment – remember, the International Monetary Fund is forecasting annual GDP growth of 1.8% for the US and 1.1% for the UK⁶ – with higher interest rates, it can be difficult to get debt levels down. 

But having high debt levels isn’t necessarily a bad thing as long as markets are confident that the government has the ability to meet its debt servicing obligations.

What can it mean for investors?

As long as risk and reward levels are balanced, government debt in the form of gilts in the UK and Treasuries in the US can be a useful part of a balanced investment portfolio. In the UK, around 30% of government debt is owned by pension plans and life assurance companies, with similar levels in the US and Europe. They hold it because the governments are considered good security and debt can be held for the long term.  

When issued by stable governments, these types of bonds have traditionally been seen as safe-haven assets, as they’re usually less volatile than equities. They also typically move in a different way, making them a popular choice for diversifying portfolios or lowering risk levels as pension holders move towards selected retirement age, for example. 

That confidence has been slightly knocked by policy moves by certain developed country governments in recent years, although the market response led to swift policy reversals, for example, in the UK and US.  

Confidence can also be affected by the downgrading of a country’s credit rating. In May 2025 for example, Moody’s downgraded the US rating from the AAA it had held since 1917 to Aa1, citing increased government debt and interest costs. However, it also stated that: ‘The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy’.⁷ 

Overall, government debt remains an important part of many diversified investment and pension portfolios. While debt levels are elevated, the stability of many developed economies mean that this shouldn’t necessarily be a cause for concern.