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The Public Debt Trap: It Is Not Just the Size of Debt, but Its Quality and Cost.

By Prof. Khalid Wassef Al-Wazani

Professor of Economics and Public Policy

Mohammed Bin Rashid School of Government

Public debt is no longer merely a fiscal indicator reflecting how much governments borrow. It has become one of the most significant determinants of economic stability and fiscal sovereignty. Yet a striking paradox remains: some economies can sustain public debt exceeding twice their GDP without facing an immediate financing crisis, while others experience severe fiscal pressures at substantially lower debt levels. This raises a fundamental question: Is the real problem the size of public debt, or its purpose, sources, structure, and cost?

According to International Monetary Fund estimates, global government debt reached approximately 94% of global GDP in 2025, with projections suggesting that it could exceed 100% before the end of this decade. Understanding these figures, however, requires examining three essential questions: Why does a country borrow? From whom does it borrow? And when must the debt be repaid, and at what cost? Indeed, the risk of falling into a debt trap depends largely on the purpose of borrowing, its financing sources, its maturity structure, and the price paid for that financing.

The United States offers a compelling illustration of this challenge. General government debt reached approximately 124% of GDP in 2025, while the projected federal deficit stands at around $1.9 trillion. Even more concerning, annual net interest payments alone are expected to exceed $1 trillion. The American debt dilemma can be understood through three interconnected dimensions, all of which contribute to what may be described as a public debt trap. First, borrowing is not devoted entirely to productive capital investment. Instead, much of it finances a structural fiscal deficit driven by recurrent expenditure, social obligations, and debt servicing itself. Second, the government relies primarily on issuing Treasury bills and bonds at market-determined interest rates rather than securing concessional development financing. Third, a significant share of these obligations requires continuous refinancing, making debt-servicing costs increasingly sensitive to movements in interest rates. The paradox is that the US dollar's status as the world's principal reserve currency provides the United States with an exceptional borrowing advantage. Yet this privilege does not eliminate the economic cost of accumulating debt. When interest payments begin competing with expenditure on education, infrastructure, and research and development, debt gradually shifts from being an instrument for financing the future to becoming a burden on future public budgets.

Japan presents a different case. The IMF projects its government debt to reach approximately 203% of GDP in 2026. Despite this exceptionally high ratio, Japan's extensive reliance on domestic-currency financing, its broad domestic investor base, and the characteristics of its financial markets provide it with a different capacity to manage its obligations. This does not mean, however, that Japane debt is entirely productive or free of risk, particularly given population ageing and rising borrowing costs.

China, meanwhile, has relied extensively on borrowing to finance infrastructure, industrial development, and technological transformation. Yet its experience also demonstrates that capital expenditure is not necessarily productive. The accumulation of local government debt and investments in projects generating inadequate returns has created mounting fiscal and economic challenges.

In Europe, France illustrates another dimension of the problem. Its public debt reached approximately 116% of GDP in 2025, alongside a fiscal deficit of around 5.1% of GDP. These pressures increasingly constrain fiscal policy, reducing the room available for public investment and for responding effectively to economic shocks.

More troubling still is the possibility that rising debt may push an economy into a self-reinforcing cycle. Higher interest payments widen fiscal deficits; larger deficits require additional borrowing; and further borrowing may crowd out private investment and increase financing costs, ultimately weakening economic growth and employment opportunities. The impact on inflation, however, is not automatic. It depends on the nature of public spending, financing arrangements, and the response of monetary policy.

The central lesson, particularly for Arab economies, is that fiscal sustainability cannot be achieved simply by controlling the debt-to-GDP ratio. It also requires improving the quality of borrowing, extending debt maturities, diversifying financing sources, and directing borrowed resources toward projects whose economic and social returns exceed their costs. Debt that builds productive capacity for the future is fundamentally different from debt that finances present consumption. Equally important, some projects may appear to be capital investments while generating substantial future commitments for administration, operation, maintenance, and long-term sustainability. Such projects can themselves become hidden debt traps, despite their seemingly productive nature. The greatest danger is that today's generations may shoulder substantial financial burdens while future generations inherit equally significant liabilities without receiving productive assets capable of justifying them. Perhaps, therefore, the most relevant question is no longer simply: How much does a country owe? Rather, we should ask:

What has the country achieved with its debt? How much will it ultimately pay for that borrowing? And who will bear its cost in the future?