Due to rising central bank rates, servicing government debt is becoming more expensive

The increase in central bank rates in developed and developing countries has an increasingly stronger impact on their budget policy – due to the rise in cost of servicing public debt and the growth of government spending on it, while the decrease in consumption as a result of tightening lending conditions hinders the increase in budget revenues. At the same time, the reduction of fiscal imbalances is hampered by the growth of military spending – the share of defense spending in the UK in 2022 amounted to 5.3% of GDP (plus 0.6% year-on-year), in Germany – 2.7% of GDP (plus 0.1% ), in the USA – 13.5% (plus 0.4% year-on-year and plus 2.6% compared to the 2020 level), records the “World Economy Barometer” of the National Research University Higher School of Economics.

The risks of an unbalanced debt load have also increased – rising debt servicing costs increase the need for new borrowing. The situation in the debt market is indirectly evidenced by the change in the share of government debt on the balance sheet of central banks – it is highest in Japan (44.4%, a consequence of multiple anti-deflation programs), Great Britain (33%), Germany (28.9%) and the countries of Southern Europe — Spain (28.3%), Italy (26.2%) and Portugal (26.2%). At the end of 2023, these shares likely increased – both the ECB and the Bank of England continued to tighten policy, the authors of the study note. The share of government debt owned by the central banks of developing countries is significantly smaller and is not growing as quickly – these banks, as a rule, are limited in their ability to purchase assets (quantitative easing creates pro-inflationary risks, and the volume of securities in circulation is usually smaller).

The share of interest payments to budget revenues, however, is growing in developing countries – in Brazil it is already 14.4%, in India – 28.1%, in South Africa – 18.5%, in China – 5.7% (and has increased by 1.6 percentage points over three years). In developed countries, these figures are also growing – in Italy, 8.4% of budget revenues are spent on interest payments, in the UK – 8.6%, in Japan – 7.4%. In the USA, the figure, however, decreased – from 9.1% at the end of 2019 to 8.5% in 2023 – due to an increase in budget revenues. However, in early June, the US debt ceiling was suspended, which provoked an increase in debt from $31.4 trillion in May to $33.9 trillion in November. Most of the new borrowings are short-term, which could lead to an increase in the share of debt servicing costs to 9.6% by 2026, S&P predicts.

Tatiana Edovina