The Organization for Economic Co-operation and Development (OECD) said today that as interest payments continue to account for an increasing proportion of government spending, soaring public debt yields have become a "major hidden danger" to countries' public finances, calling on countries to control spending.
The Financial Times reported that OECD chief economist Stefano Scarpetta said that the rising borrowing costs for governments was partly due to market concerns about the soundness of public finances. The Paris-based OECD warned that many member countries were facing "increasingly urgent fiscal challenges".
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The OECD pointed out in its latest provisional economic outlook that more and more governments are taking fiscal intervention measures to try to lower energy costs for consumers and businesses, but only about half of these measures can accurately target the target audience, which in turn further increases the pressure on public finances.
The average yield on 10-year benchmark government bonds among members of the Seven Major Industrial Countries (G7) has risen to 4% this year, the first time since 2008. The U.S. war with Iran and the ensuing surge in energy prices fueled a sell-off in bonds, reflecting investor concerns about rising inflation.
Rising borrowing costs and record levels of debt issuance by rich-world governments are raising the cost of servicing debt and worrying policymakers.
"Rising bond yields are a major concern," Scarpetta told the Financial Times.
He said that since the financial crisis, as the global economy has suffered various shocks one after another, the debt-to-GDP ratio of various countries has been rising. "At a time when the debt-to-GDP ratio is already at a very high level, the cost of debt servicing will continue to increase."
The OECD said in its provisional economic outlook that governments will need to "make greater efforts" to "control and reallocate" spending while improving public sector efficiency to ensure "long-term debt sustainability" and give policymakers the ability to respond to future shocks.
Another report released today by the Institute of International Finance (IIF) pointed out that in the first half of 2026, the total global household, corporate and government debt climbed to a new high of 365 trillion US dollars, higher than 347 trillion US dollars a year ago, of which government debt exceeded 110 trillion US dollars.
The IIF said that if measured as a share of global economic output, the overall debt ratio has fallen from its peak during the epidemic, mainly due to rising inflation. "But this seemingly benign appearance has concealed a greater increase in debt repayment costs."
The IIF also said that over the past year, developed economies paid more than $3.5 trillion in interest on bonds traded on international markets, higher than $2.6 trillion in AI spending, $3.1 trillion in defense spending and $3.4 trillion in energy spending.
At a time when borrowing costs remain high, countries are increasingly relying on short-term bonds, which typically offer lower yields than longer-term bonds. The United States is expected to issue up to $1 trillion in short-term Treasury bills next year, which is borrowing with a maturity of less than 12 months; this figure does not include funds raised to repay maturing debt.
But it also makes the cost of debt more sensitive to rising interest rates, as higher market yields are reflected in interest payments more quickly.
One way to escape debt pressure is to increase economic growth. The OECD said that current investment and trade related to artificial intelligence (AI) are helping the global economy withstand the oil shock caused by conflicts in the Middle East with better-than-expected performance.
The OECD said that the Group of 20 (G20) economies will grow by 3.1% this year, 0.1 percentage points higher than the June forecast, and the global economy is expected to continue to grow at a similar rate of 3% in 2027.
However, many analysts warn that with international crude oil prices hovering near US$100 per barrel and the U.S.-Iran war still having no end in sight, global economic output may face a greater impact.
The OECD predicts that the inflation rate in G20 countries will rise to 4.1% from 3.4% last year. Currently, more than half of the G20 countries have inflation rates higher than the targets set by their central banks. (Compiled by: Chen Yiwei) 1150924
