Global debt trap fears grow as 2026 seen as key warning year

As the world enters 2026, the global economy may appear more resilient to geopolitical shocks than many expected.

But beneath the surface, economists are increasingly alarmed by what they describe as an expanding public-debt crisis, one that risks turning into a vicious cycle that becomes difficult to escape.

Gerard Lyons, chief economic strategist at Netwealth, says a full-scale rupture may not erupt immediately.

Even so, he argues that 2026 will be the year when early warning signs become most visible, before the world risks sliding more fully into a “debt trap” by the end of this decade.

Major powers become major debtors

The concern, as presented in the analysis, is that the world’s biggest economies are carrying debt burdens that are close to or exceed the scale of their ability to produce and earn, measured against GDP.

It cites the United States as running public debt at 125% of GDP, or about US$38 trillion.

Japan is described as having the highest public-debt level among advanced economies at 230% of GDP, while Singapore is put at 176% and France at 117%.

The United Kingdom is described as having public debt roughly equal to GDP, alongside a budget deficit of more than 5% of GDP.

The broader warning is that six of the seven G7 economies are heading towards a “debt trap” by the end of this decade because public spending is rising while revenues are not growing at the same pace.

Four forces pushing the world deeper into debt

The article argues that global debt has been accumulating for decades, echoing Ernest Hemingway’s line that financial crises happen gradually, then suddenly.

It points to two major shocks that accelerated the build-up: the 2008 global financial crisis and the Covid-19 pandemic, when governments borrowed vast sums to support citizens and prop up economies.

During Covid-19, it says, global public debt jumped above 90% of GDP as tax revenues fell while healthcare and relief spending surged.

Beyond crisis-era borrowing, it highlights a more structural problem: chronic budget deficits, where governments borrow to cover the gap when tax receipts cannot match spending.

It adds that ageing societies are raising the long-term bill for welfare and pensions, while geopolitical tensions are pushing countries to borrow more to expand defence budgets in the name of national security.

But the central issue, it argues, is not only the debt stock, but also the growth gap.

If debt grows faster than national income, the debt-to-GDP ratio rises steadily towards an unsustainable point.

The article gives a simple example: if GDP grows at 3% while debt grows at 5%, the debt burden keeps climbing.

With many economies facing slower growth, it says the “denominator” in the equation, GDP, is not expanding fast enough to bring debt ratios down.

The end of “cheap money”

The piece argues that the era of near-free borrowing has ended, turning the debt problem into a cost-of-servicing problem.

As global policy interest rates rose to fight inflation, governments were forced to refinance maturing debt and issue new debt at much higher rates.

That raises interest costs sharply, and can create a cycle where governments borrow again simply to meet interest payments on existing debt, deepening what it calls a debt spiral.

It cites the IMF as saying global public debt is approaching US$100 trillion, and forecasts that by 2029, accumulated debt could exceed the size of the entire world economy, an unprecedented level since after World War II.

In the United States, it says interest payments alone have risen to US$1.2 trillion, equivalent to about 17% of total government spending.

It also cites the Organisation for Economic Co-operation and Development (OECD) as warning that 42% of global public debt will mature by 2027, meaning governments will need to refinance a large share of borrowing at today’s higher rates, nearly double the cost compared with the low-rate era.

New spending pressures defence commitments

The analysis argues that new spending demands are also mounting, including defence commitments.

It notes that NATO members have agreed to raise defence spending to 5% of GDP by 2035, and says countries such as Germany, Finland and Belgium have begun signalling the need for additional borrowing to meet these targets, describing the pressure as linked to Donald Trump.

How it could hit households

The piece says the debt spiral could reach ordinary people through three main channels.

First, governments may be pushed into raising taxes and cutting welfare, leaving less room for investment in infrastructure, education and public health because debt interest becomes the first call on budgets.

It points to Japan as a clear example, saying that under Prime Minister Sanae Takaichi, the government reached a preliminary agreement to raise personal income tax by 1% across all income brackets in 2027 to fund a rise in defence spending to 2% of GDP.

Second, it warns of prolonged inflation.

To reduce the real value of debt over time, governments may tolerate higher inflation, which would mean persistently higher living costs and weaker purchasing power.

Third, it flags financial-market volatility, arguing that one early signal of stress is not only debt levels but also rising risk premia in government bonds.

Lyons points to France and the UK, describing them as vulnerable because they rely heavily on foreign investors to buy their bonds.

If foreign investors lose confidence that a government can control its finances, or fear inflation will erode returns, they demand higher yields.

That pushes bond yields up, raising borrowing costs and feeding back into the debt problem.

The political obstacle to a sustainable exit

The article argues that the only sustainable path is to make GDP grow faster than debt.

However, Lyons says the biggest obstacle is political.

Reducing debt typically requires what the piece calls a primary budget surplus, collecting more revenue than spending, excluding interest payments.

In the UK, it says, such a surplus has been achieved only seven times since 1969, as politicians often avoid spending cuts or tax rises for fear of losing votes, allowing the debt burden to accumulate until it becomes a crisis.

The piece concludes that 2026 should be treated as a year to tighten personal financial planning, reducing household debt and preparing for fiscal and market turbulence, because once the global debt spiral reaches its limit, those best prepared for the shock are most likely to withstand it.