IMF Projects U.S. Interest Costs to Reach 5.7% of GDP by 2031

The International Monetary Fund projects U.S. government interest payments will reach 5.7% of gross domestic product in 2031, roughly matching Social Security spending as higher borrowing costs add pressure to public budgets.

The average effective cost of government financing is projected to rise from 2.3% in 2021 to 3.7% by 2031. The forecast comes as government bond yields climb and debt-service costs increase across major economies.

Over the seven months from February to September, the G7’s average 10-year government yield gained more than 100 basis points and reached a level last seen almost 20 years ago. Global public debt is projected to exceed annual global output by 2030, a threshold last reached just after World War II. The figures add a fiscal-cost dimension to the IMF’s earlier warning about debt and AI-related borrowing in bond markets.

The IMF points to persistent inflation, higher oil prices, investment demand and growth expectations linked to artificial intelligence as factors behind rising yields. High government debt, expanding spending needs and expectations of substantial bond issuance also contribute to pressure. Higher yields in major economies can lift financing costs in other countries.

Low-income countries currently spend more than 15% of fiscal revenue on interest payments, compared with an average of about 9% from 2011 to 2019. Those payments leave governments with less room for infrastructure, social programs and economic support, and limit their capacity to respond to downturns or meet defense and energy-security needs.

The global primary deficit is projected to reach 3.3% of GDP in 2026. The IMF says stabilizing the global debt-to-GDP ratio this year would require reducing the global primary deficit to about 2.6% of GDP. A similar adjustment would be needed in later years as debt continues to rise.

Debt maturity affects how quickly rate changes reach government budgets. Countries refinancing debt over shorter periods pass higher policy rates into their borrowing costs sooner. The IMF also cautions that a shift in investor risk appetite could widen sovereign spreads and restrict emerging markets’ access to international funding.

Multiyear budget plans, active debt management, more effective tax collection and better-targeted spending could help contain financing costs and ease pressure on public budgets.