After a Brief Reprieve, Debt Levels in Many Advanced Economies Are Set to Rise

Although government debt in advanced economies has fallen since 2020, governments' fiscal space will begin to narrow again in the medium term due to rising interest rates and slowing economic growth, which will limit their ability to address future economic emergencies and potentially increase financial instability risks in more vulnerable countries like Italy. Fiscal deficits -- which are the principal driver of changes in the debt-to-GDP ratio -- peaked in 2020 at the height of the COVID-19 crisis. Since then, government debt-to-GDP ratios in advanced economies have declined. Average euro area debt fell from 79.4% of GDP to 76.6% between 2020 and 2022. The average amount of debt outstanding in G-7 countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) also declined from 95.5% of GDP to 90.7% within the same time period, while U.S. government debt, in particular, declined from 99.1% of GDP to 94.7%....