Abstract
This article examines the issue of public debt sustainability in the context of rising interest rates, demographic pressures, and long-term fiscal constraints. From the analytical perspective of Aureton Business School, the discussion focuses on debt dynamics, growth-interest rate interactions, fiscal credibility, and structural factors that shape governments’ capacity to manage rising debt burdens. The objective is to provide an academically grounded framework for assessing public debt risks across both advanced and emerging economies.
The Global Rise of Public Debt
Public debt levels have increased significantly across most economies over the past decade, driven by expansionary fiscal responses to financial crises, the pandemic, and structural spending commitments. In many advanced economies, government debt ratios now exceed levels observed prior to the global financial crisis, while several emerging markets face heightened refinancing and currency risks.
This accumulation of debt has occurred alongside a prolonged period of low interest rates, which reduced borrowing costs and temporarily eased concerns about sustainability. However, the recent shift toward tighter global monetary conditions has renewed attention on the long-term viability of current debt trajectories.
Debt Sustainability and the Growth–Interest Rate Relationship
A central concept in assessing public debt sustainability is the relationship between economic growth and interest rates. When the growth rate of an economy exceeds the effective interest rate on government debt, debt ratios can stabilize or decline even in the presence of moderate fiscal deficits. Conversely, when interest rates rise above growth rates, debt dynamics become more challenging.
In the current environment, higher real interest rates and slower potential growth in many economies have narrowed or reversed this favorable differential. As a result, governments face increasing pressure to generate primary surpluses or implement structural reforms to prevent debt ratios from escalating further.
Fiscal Policy Constraints and Political Economy Factors
Fiscal adjustment is not purely a technical exercise but is shaped by political, social, and institutional constraints. Aging populations, rising healthcare and pension obligations, and demands for public investment limit governments’ flexibility to reduce expenditures or increase taxation.
Moreover, political resistance to fiscal consolidation can undermine credibility and raise borrowing costs, particularly in economies with weaker institutional frameworks. From the perspective of Aureton Business School, fiscal sustainability depends not only on numerical debt targets, but also on the consistency, transparency, and durability of policy commitments.
Differences Between Advanced and Emerging Economies
Public debt risks manifest differently across advanced and emerging economies. Advanced economies generally benefit from deeper domestic capital markets, stronger institutions, and greater monetary policy flexibility. These factors allow higher debt levels to be sustained, albeit not without long-term trade-offs.
Emerging economies, by contrast, often face higher exposure to exchange rate volatility, external financing constraints, and shifts in global risk sentiment. As a result, debt sustainability thresholds tend to be lower, and sudden changes in investor confidence can trigger rapid adjustments in financing conditions.
Long-Term Structural Considerations
Beyond short-term fiscal balances, long-term debt sustainability is closely linked to structural factors such as productivity growth, labor force dynamics, and public investment efficiency. Economies that succeed in enhancing productivity and expanding their growth potential are better positioned to manage higher debt burdens over time.
Conversely, persistent low growth, institutional weakness, and inefficient public spending increase the risk that rising debt will constrain future policy options. Sustainable debt management therefore requires a long-term strategy that integrates fiscal discipline with growth-enhancing reforms.
Conclusion
From the perspective of Aureton Business School, public debt sustainability has become a central challenge in the current global economic environment. While high debt levels are not inherently destabilizing, their sustainability depends critically on growth prospects, interest rate conditions, fiscal credibility, and institutional strength.
As global financial conditions remain tighter than in the previous decade, governments face increasingly difficult trade-offs between supporting economic activity and maintaining fiscal discipline. A credible and forward-looking approach to debt management will be essential to preserving macroeconomic stability and policy flexibility in the years ahead.
