October 10, 2025 • 10 mins
Some of the world's wealthiest countries are struggling with debts higher than their own GDP, and it's upending their politics. Governments in France, the UK, the US and elsewhere are having to balance rising interest payments with demands for more investment, welfare or security. Bloomberg's Head of Economics and Government Stephanie Flanders joins host Stephen Carroll to discuss.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:08):
I'm Stephen Carroll and this is Here's Why, where we
take one news story and explain it in just a
few minutes with our experts here at Bloomberg. That fiscally
fraught for I think are very vulnerable to the significant word.
Speaker 1 (00:23):
Cellot Luke own you warning that the deficit could actually
reach a six percent.
Speaker 2 (00:29):
Large esteined fiscal deficits we've seen in a really long time.
Those are pushing our star hire. The US fiscal situation
is that of a nation that's trying to work its
way over recession.
Speaker 1 (00:39):
High level of deficit, it is potentially inflationary.
Speaker 2 (00:42):
There are still people who peddle the idea that we
could just abandon economic responsibility, cast off any constraints on spending.
They're wrong. France's breaking records for short lived governments, Britain's
Labor Party has seen its popularity collapse within a year
of its slide election win, and by contrast, Italy's current
(01:03):
government is one of the most stable in recent history.
Governments across the developed world are more in debted than ever,
forcing difficult choices from politicians who see a greater proportion
of their public finances going to servicing their debts. How
they address this challenge is also now even more closely
tied to their political fortunes. Here's why debt is now
(01:25):
a driving political force. Our head of Economics and Government,
Stephanie Flanders, joins me. Now for more. Stephanie, First of all,
how big a problem is debt in developed economies?
Speaker 1 (01:37):
Well, I guess the quick thing to say is it's
a much bigger problem than it was ten or fifteen
years ago. Before the global financial crisis, the early years
of the two thousands, we used to talk about debt
in advanced economies being in the range of forty to
seventy percent of GDP. There were exceptions to that, but
you remember, even when countries joining the Eurozone, they were
(01:59):
supposed to get to a around sixty percent of their
national income level of debt, and that for most countries
was not a big heavy lift. But when we had
the global financial crisis, governments had to bail all the
banks out and support the economy for a long time,
we had debt take a step change up. And then
another step change came when we had COVID and all
the expenditure associated with that, and you end up with
(02:20):
a situation where debt has more or less doubled and
many economies relative to the overall size of the economy.
What's funny is that although the debt rose quite significantly
after the global financial crisis, it's really only been a
problem recently because you had a combination of high debt
and interest rates going up. You had an amazing situation
(02:41):
before that where although debt has gone up a lot,
the cost of servicing that debt had been going down
and down and down. You know, we went into this
era of sometimes having zero negative interest rates, and that
was making it very easy for governments to ignore the
problem of debt, the big stock of debt sitting there
but no longer.
Speaker 2 (02:58):
When we think about the world's developed economies, are they
all in a similar boat? How similar, say, is the
situation in France or in the UK, both of which
are seeing impacts on the political scene.
Speaker 1 (03:09):
There's some structural forces that are common to all countries,
and then there's specific things that are causing markets to
focus on one aspect more than another and making things
particularly difficult for government. So, you know, the structural things
are you know, I've already mentioned it. Interest rates have
taken this kind of step change up in response to
the inflation we had after COVID. That's made it more
expensive to finance the debt everywhere, and suddenly finance ministers
(03:32):
they're noticing that a much larger share of the money
coming in in tax revenues is going out in the
form of just servicing debt, which no finance minister really
likes to do. They want to spend on hospitals and schools,
and so the voters want them to do that. So
there's that structural problem. There's also the problems we often
talk about, aging populations, the pressure of health spending. All
of those things are not going away. I think what
(03:55):
is distinctive in different countries is how much those problems
are really sort of biting and inter reacting with the
politics of the country. So in the UK, the stock
of debt is actually not as high as it is
in France. It's around one hundred percent of GDP, and
we have a pretty sort of reasonable approach to stabilizing
(04:15):
that debt. But unfortunately we have very low maturity debt,
so our debt sort of rolls over very quickly. You
quite often have to go back into the market to
refinance your debt, and that means that it's been much
more susceptible to that rise in interest rates than say France,
which actually had slightly older debt, had a high maturity debt.
The average bit of debt owed to the French government
(04:35):
was kind of seven or eight years, and it's quite
a lot shorter than that in the case of the UK.
So there were specific things that cause the problem to
be different in different countries. In the UK it's a
sort of liquidity problem, not so much a stock problem.
People in the financial markets just worry a bit year
to year about how that money's going to be raised
to finance the debt. In France, it's more people look
at it and say, wow, they can finance it this
(04:57):
year and next year, but you know, when are they
actually going to bring it down? When is the political
system going to coalesce enough to actually take action on this.
Speaker 2 (05:06):
Is the United States in the same situation or is
it exceptional in this regard?
Speaker 1 (05:10):
So if you didn't know that you were talking about
the US and you just looked at their numbers, you'd
think it was sort of a worse case than Italy.
It's got a higher debt one hundred and twenty percent
of GDP, it has a higher fiscal deficit, it's borrowing
a lot, even though the economy has been very strong.
It's actually not in a recession, which is pretty unusual.
And it has a Congress and a president that have
(05:31):
now adding to debt, passing tax cuts and other things
that are costing a lot of money. If you didn't
know it was the US, you'd say all of those things,
it's heading for a disaster. What the US, but of
course is exceptional, and one of the big things it
has in its favor is the dollar as the reserve
currency for the whole world. It is also often a
safe haven for financial markets, and probably most important of all,
(05:53):
it's been growing a lot faster than the European countries
I've been talking about, so it doesn't have to work
so hard to finance that debt year to year, even
though it is growing and growing, and people do wonder
whether the situation is going to shift in the next
few years in terms of people worrying a lot more
about the US, but at the moment, surprisingly little.
Speaker 2 (06:12):
How are political leaders dealing with the challenges then, of
higher debt and debt repayments are there good or bad
examples that we can look to.
Speaker 1 (06:20):
I was thinking about this and I was all the
good examples I could think of, they all seem to
be a long time ago, and there's very few good
examples today. So if you look back in the early nineties,
Sweden had very high levels of debt and actually had
an interesting time where the Social Democrats, the left wing party, said, look,
as long as we haven't got on top of this
debt and spending, we're going to be beholden to the
(06:41):
financial markets. We won't have our own freedom of maneuver
as a country, and we won't be able to do
the things we want to do. And they took some
really difficult decisions at various times. Other countries do that.
We even saw it in the US in the eighties,
long term problems they were facing with social security got
fixed well ahead of time. In the UK as well,
had changes to pension rules that actually long term reduced
(07:04):
the cost of spending. There hasn't been a lot of
that in the last few years, I have to say,
And when you talk about how well politicians are dealing
with it, there aren't many that are really dealing with
it at all.
Speaker 2 (07:14):
Can debt via the bond markets actually helped to rein
in politicians who might have more unconventional fiscal plans or
who are ignoring some of their debt problems.
Speaker 1 (07:25):
I mean, that's what we've traditionally seen. And you know,
you remember there was that famous you know, the advisor
James Carville to Bill Clinton said or when I die,
I want to come back as a bond trader, because
they get to call the shots. And it used to
be that that kind of pressure did make a difference
to government's changing policy. And of course we've seen that
in extreme cases in the last few years. Liz trust
(07:47):
government was famously brought down by the bond market's reaction,
among other things, the bond market's reaction to her budget,
her emergency budget. But if you look at the US,
as I said before, but it just doesn't seem to
be operating in a way it might have done in
the past. I mean, the US is the only developed
economy to have seen its ten year cost of borrowing
(08:08):
actually go down slightly since the start of this year.
It had gone up a bit since before that. But
when you think about how much debt has now in
the future is going to go up as a result
of Donald Trump's big beautiful bill and the sort of
lack of responsible policy making in Washington. It's, in a way,
the bomb market's kind of letting the US off the hook.
Speaker 2 (08:31):
Do we have any conception that voters are making political
choices because of the debt problem or paying attention to
it in a close way?
Speaker 1 (08:40):
I mean, the curious thing about this is if you
look at opinion polls, the majority of voters, and probably
more than a few years ago, are worried about debt,
say it's a big problem that the government needs to fix.
In the case of the UK, people more generally are
sort of worried that the government has kind of lost
control of the economy, or at least has lost the
ability to do the things that it wants to do
(09:02):
because of this buying they're in over debt and the
low level of growth. But then you look at what
voters actually vote for, and by and large, they haven't
shown a great desire to vote for parties that are
promising tough decisions. You know, in the UK, one of
the things long term that's really affecting the structural increase
in spending is the pension's triple lock this commitment to
(09:25):
always increasing the state pension by either two and a
half percent or the right of average earnings or the
rate of inflation, whichever of them is higher. It's been
consistently rising the pension spending as a share of pretty
much everything. But no party, even when they pay lip
(09:46):
service to wanting to control the debt, is willing to
say to voters, you know what, that's got to change.
Speaker 2 (09:52):
Okay, Thanks to you, Stephanie Flanders, our head of economics
and Government at Bloomberg. For more explanations like this from
our team of three thousand journalists and analysts around the world,
go to bloomberg dot com slash explainers. I'm Stephen Carroll.
This is here's why. I'll be back next week with more.
Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:08):
I'm Stephen Carroll and this is Here's Why, where we
take one news story and explain it in just a
few minutes with our experts here at Bloomberg. That fiscally
fraught for I think are very vulnerable to the significant word.
Speaker 1 (00:23):
Cellot Luke own you warning that the deficit could actually
reach a six percent.
Speaker 2 (00:29):
Large esteined fiscal deficits we've seen in a really long time.
Those are pushing our star hire. The US fiscal situation
is that of a nation that's trying to work its
way over recession.
Speaker 1 (00:39):
High level of deficit, it is potentially inflationary.
Speaker 2 (00:42):
There are still people who peddle the idea that we
could just abandon economic responsibility, cast off any constraints on spending.
They're wrong. France's breaking records for short lived governments, Britain's
Labor Party has seen its popularity collapse within a year
of its slide election win, and by contrast, Italy's current
(01:03):
government is one of the most stable in recent history.
Governments across the developed world are more in debted than ever,
forcing difficult choices from politicians who see a greater proportion
of their public finances going to servicing their debts. How
they address this challenge is also now even more closely
tied to their political fortunes. Here's why debt is now
(01:25):
a driving political force. Our head of Economics and Government,
Stephanie Flanders, joins me. Now for more. Stephanie, First of all,
how big a problem is debt in developed economies?
Speaker 1 (01:37):
Well, I guess the quick thing to say is it's
a much bigger problem than it was ten or fifteen
years ago. Before the global financial crisis, the early years
of the two thousands, we used to talk about debt
in advanced economies being in the range of forty to
seventy percent of GDP. There were exceptions to that, but
you remember, even when countries joining the Eurozone, they were
(01:59):
supposed to get to a around sixty percent of their
national income level of debt, and that for most countries
was not a big heavy lift. But when we had
the global financial crisis, governments had to bail all the
banks out and support the economy for a long time,
we had debt take a step change up. And then
another step change came when we had COVID and all
the expenditure associated with that, and you end up with
(02:20):
a situation where debt has more or less doubled and
many economies relative to the overall size of the economy.
What's funny is that although the debt rose quite significantly
after the global financial crisis, it's really only been a
problem recently because you had a combination of high debt
and interest rates going up. You had an amazing situation
(02:41):
before that where although debt has gone up a lot,
the cost of servicing that debt had been going down
and down and down. You know, we went into this
era of sometimes having zero negative interest rates, and that
was making it very easy for governments to ignore the
problem of debt, the big stock of debt sitting there
but no longer.
Speaker 2 (02:58):
When we think about the world's developed economies, are they
all in a similar boat? How similar, say, is the
situation in France or in the UK, both of which
are seeing impacts on the political scene.
Speaker 1 (03:09):
There's some structural forces that are common to all countries,
and then there's specific things that are causing markets to
focus on one aspect more than another and making things
particularly difficult for government. So, you know, the structural things
are you know, I've already mentioned it. Interest rates have
taken this kind of step change up in response to
the inflation we had after COVID. That's made it more
expensive to finance the debt everywhere, and suddenly finance ministers
(03:32):
they're noticing that a much larger share of the money
coming in in tax revenues is going out in the
form of just servicing debt, which no finance minister really
likes to do. They want to spend on hospitals and schools,
and so the voters want them to do that. So
there's that structural problem. There's also the problems we often
talk about, aging populations, the pressure of health spending. All
of those things are not going away. I think what
(03:55):
is distinctive in different countries is how much those problems
are really sort of biting and inter reacting with the
politics of the country. So in the UK, the stock
of debt is actually not as high as it is
in France. It's around one hundred percent of GDP, and
we have a pretty sort of reasonable approach to stabilizing
(04:15):
that debt. But unfortunately we have very low maturity debt,
so our debt sort of rolls over very quickly. You
quite often have to go back into the market to
refinance your debt, and that means that it's been much
more susceptible to that rise in interest rates than say France,
which actually had slightly older debt, had a high maturity debt.
The average bit of debt owed to the French government
(04:35):
was kind of seven or eight years, and it's quite
a lot shorter than that in the case of the UK.
So there were specific things that cause the problem to
be different in different countries. In the UK it's a
sort of liquidity problem, not so much a stock problem.
People in the financial markets just worry a bit year
to year about how that money's going to be raised
to finance the debt. In France, it's more people look
at it and say, wow, they can finance it this
(04:57):
year and next year, but you know, when are they
actually going to bring it down? When is the political
system going to coalesce enough to actually take action on this.
Speaker 2 (05:06):
Is the United States in the same situation or is
it exceptional in this regard?
Speaker 1 (05:10):
So if you didn't know that you were talking about
the US and you just looked at their numbers, you'd
think it was sort of a worse case than Italy.
It's got a higher debt one hundred and twenty percent
of GDP, it has a higher fiscal deficit, it's borrowing
a lot, even though the economy has been very strong.
It's actually not in a recession, which is pretty unusual.
And it has a Congress and a president that have
(05:31):
now adding to debt, passing tax cuts and other things
that are costing a lot of money. If you didn't
know it was the US, you'd say all of those things,
it's heading for a disaster. What the US, but of
course is exceptional, and one of the big things it
has in its favor is the dollar as the reserve
currency for the whole world. It is also often a
safe haven for financial markets, and probably most important of all,
(05:53):
it's been growing a lot faster than the European countries
I've been talking about, so it doesn't have to work
so hard to finance that debt year to year, even
though it is growing and growing, and people do wonder
whether the situation is going to shift in the next
few years in terms of people worrying a lot more
about the US, but at the moment, surprisingly little.
Speaker 2 (06:12):
How are political leaders dealing with the challenges then, of
higher debt and debt repayments are there good or bad
examples that we can look to.
Speaker 1 (06:20):
I was thinking about this and I was all the
good examples I could think of, they all seem to
be a long time ago, and there's very few good
examples today. So if you look back in the early nineties,
Sweden had very high levels of debt and actually had
an interesting time where the Social Democrats, the left wing party, said, look,
as long as we haven't got on top of this
debt and spending, we're going to be beholden to the
(06:41):
financial markets. We won't have our own freedom of maneuver
as a country, and we won't be able to do
the things we want to do. And they took some
really difficult decisions at various times. Other countries do that.
We even saw it in the US in the eighties,
long term problems they were facing with social security got
fixed well ahead of time. In the UK as well,
had changes to pension rules that actually long term reduced
(07:04):
the cost of spending. There hasn't been a lot of
that in the last few years, I have to say,
And when you talk about how well politicians are dealing
with it, there aren't many that are really dealing with
it at all.
Speaker 2 (07:14):
Can debt via the bond markets actually helped to rein
in politicians who might have more unconventional fiscal plans or
who are ignoring some of their debt problems.
Speaker 1 (07:25):
I mean, that's what we've traditionally seen. And you know,
you remember there was that famous you know, the advisor
James Carville to Bill Clinton said or when I die,
I want to come back as a bond trader, because
they get to call the shots. And it used to
be that that kind of pressure did make a difference
to government's changing policy. And of course we've seen that
in extreme cases in the last few years. Liz trust
(07:47):
government was famously brought down by the bond market's reaction,
among other things, the bond market's reaction to her budget,
her emergency budget. But if you look at the US,
as I said before, but it just doesn't seem to
be operating in a way it might have done in
the past. I mean, the US is the only developed
economy to have seen its ten year cost of borrowing
(08:08):
actually go down slightly since the start of this year.
It had gone up a bit since before that. But
when you think about how much debt has now in
the future is going to go up as a result
of Donald Trump's big beautiful bill and the sort of
lack of responsible policy making in Washington. It's, in a way,
the bomb market's kind of letting the US off the hook.
Speaker 2 (08:31):
Do we have any conception that voters are making political
choices because of the debt problem or paying attention to
it in a close way?
Speaker 1 (08:40):
I mean, the curious thing about this is if you
look at opinion polls, the majority of voters, and probably
more than a few years ago, are worried about debt,
say it's a big problem that the government needs to fix.
In the case of the UK, people more generally are
sort of worried that the government has kind of lost
control of the economy, or at least has lost the
ability to do the things that it wants to do
(09:02):
because of this buying they're in over debt and the
low level of growth. But then you look at what
voters actually vote for, and by and large, they haven't
shown a great desire to vote for parties that are
promising tough decisions. You know, in the UK, one of
the things long term that's really affecting the structural increase
in spending is the pension's triple lock this commitment to
(09:25):
always increasing the state pension by either two and a
half percent or the right of average earnings or the
rate of inflation, whichever of them is higher. It's been
consistently rising the pension spending as a share of pretty
much everything. But no party, even when they pay lip
(09:46):
service to wanting to control the debt, is willing to
say to voters, you know what, that's got to change.
Speaker 2 (09:52):
Okay, Thanks to you, Stephanie Flanders, our head of economics
and Government at Bloomberg. For more explanations like this from
our team of three thousand journalists and analysts around the world,
go to bloomberg dot com slash explainers. I'm Stephen Carroll.
This is here's why. I'll be back next week with more.
Thanks for listening.
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