Relentless surge in government debt is unsustainable says BIS
Policymakers across the world need to get a grip on the relentless surge in public government debt, a leading economist has warned.
Agustin Carstens, general manager of the Bank for International Settlements (BIS) said fiscal authorities have a “narrow window” to put their house in order “before the public’s trust in their commitments starts to fray.”
The BIS, often dubbed a “central bank for central banks,” promotes global monetary and financial stability by encouraging cooperation among central banks and other financial authorities worldwide.
The remarks come after the latest Office for National Statistics (ONS) figures showed that Chancellor Rachel Reeves faces an impossible mission to control public finances.
Borrowing in April came in at £20.2bn, ahead of economists’ prediction of £18bn.
Tax receipts topped £62bn, whilst government expenditure was provisionally set at £93.3bn. This puts the Chancellor’s “iron clad” fiscal rules, where she pledges to fund day-to-day spending by tax receipts, in jeopardy.
Public sector net debt (PSND) was equivalent to 95.5 per cent of GDP at the end of April 2025. It was 94.8 per cent of GDP at the end of April 2024.
Large deficits and ballooning debts
Reeves’ decision to increase borrowing by nearly £20bn in her maiden budget to fund infrastructure and housing projects spooked the market when announced and sent yields on government bonds surging.
Speaking at a Bank of Japan conference in Tokyo, Carsten said that large deficits and ballooning debt loads were not an issue when interest rates were lower, allowing governments to delay tough calls, such as slashing spending or hiking taxes.
However, interest rates on government bonds around the world have spiked over the past five years and the trend has only accelerated since the beignning of 2025.
The 40-year Japanese bond now yields nearly 3.7 per cent, up a full percentage point just since the beginning of April and a far cry from the near-zero rate the Japanese government was paying five years ago.
Meanwhile, the yield on the 10-year US Treasury has risen to 4.6 per cent and the yield on 10-year UK gilts has risen to nearly 4.7 per cent.
Essential to curb the relentless rise in government debt
Carstens said: “Markets are already waking up to the fact that some paths are not sustainable.
“That is why fiscal consolidation in many economies needs to start now. Muddling through is not enough.”
He warned that public defaults could shake the global financial system if central banks are pushed to fund government deficits, creating a situation where monetary policy would lose its independence.
“The result would be rising inflation and sharp exchange rate depreciations,” he said.
“In light of these considerations, it is essential for fiscal authorities to curb the relentless rise in public debt.”