Developed Market Government Debt to Increase by $4.4Trillion

Developed Market Government Debt to Increase by $4.4Trillion

Developed market (DM) general government debt will increase by another USD4.4 trillion this year to USD75.5 trillion or 105% of GDP by the end of 2026, reflecting continued large budget deficits, Fitch Ratings says in its quarterly Developed Market Sovereigns Debt Sustainability Monitor.

According to the ratings agency, government debt has risen relentlessly from USD26 trillion, which was 68% of GDP 20 years ago, with over 60% driven by the US.

Among the largest 10 developed market economies (DM10), Fitch forecasts the US to run the largest general government budget deficit this year at 7.3% of GDP or USD2.3 trillion.

It noted that the U.S. will be trailed by France at 5.4%, the UK at 4.7%, and Germany at 4.0%. “We project a widening from 2025 in the US, Germany and Japan reflecting fiscal stimulus programmes”, Fitch said.

In 2026, heightened geopolitical risks will add to defence spending pressures facing European and other sovereigns, Fitch said.

The global rating firm said this will compound the challenge of stabilising and reducing government debt in many DMs in the context of subdued GDP growth, rising interest costs, strong spending demands and difficult political backdrops.

The average of DM10 government 10-year bond yields increased by 12bp in 4Q25 and 21bp for 2025 as a whole, with the largest increase in Japan.

Fitch said the average interest rate on debt stocks is below current yields (except in Canada and Switzerland), so this will rise as debt matures and is refinanced at prevailing market rates.

The term spread of 30-year over 10-year bonds widened by an average of 23bp across the DM10 in 2025, albeit mainly in 1H25.

This could be a signal of rising market wariness over long-term inflation risks, the weight of bond supply or, in some cases, fiscal sustainability risks, according to the report.

Fiscal policy setbacks, political volatility or threats to central bank independence could add to the term premium. If there were a shock to bond yields, then stabilising debt ratios would become even more challenging for some DM sovereigns. Developed Market Government Debt to Increase by $4.4Trillion