How higher interest rates will squeeze government budgets

In recent years government debt appeared to matter less and less even as countries borrowed more and more. Falling interest rates made debts cheap to service, even as they grew to levels that would have seemed dangerous a generation before. The pandemic put both trends into overdrive: the rich world borrowed 10.5% of its gdp in 2020 and another 7.3% in 2021, even as long-term bond yields plunged. Now central banks are raising interest rates to fight inflation and public debt is becoming more burdensome. Our calculations show that government budgets will feel a squeeze far more quickly than is commonly understood.