Morgan Stanley: Developed-economy debt sees short-term relief, but medium- and long-term fiscal pressures remain

How much has the debt outlook improved from a year ago?

Morgan Stanley expects debt to be about 122% of GDP in 2030 across the ten developed economies it covers, approximately 5 percentage points below its October 2025 forecast. Interest rates have risen and deficits have changed little; the improvement mainly reflects stronger-than-expected nominal growth.
Growth has boosted tax revenues and expanded the denominator of the debt ratio, but this growth was driven jointly by AI investment and price increases associated with tariffs and energy. If the price effect fades, the support for debt metrics will also weaken.
The fiscal improvement is less durable: the bank expects the sample’s weighted-average primary deficit to be about 1.9% of GDP in 2030, slightly above the 1.8% forecast a year ago. The primary deficit is the fiscal deficit excluding interest spending.

When nominal GDP grows faster than the average cost of debt, economies can sustain a certain primary deficit while keeping their debt ratios stable; but an excessive deficit can still offset the benefits of growth. Morgan Stanley notes that the primary deficits of Germany, France and the United States exceed the levels needed to stabilize debt.
Nominal growth affects debt ratios relatively quickly, whereas higher market interest rates are gradually incorporated into costs only as old debt matures and is refinanced. Developed-economy debt typically has maturities of 5 to 9 years, so an improvement in short-term debt arithmetic can coincide with mounting interest pressure over the medium term.
For the United States, in the bank’s scenario, interest rates 1 percentage point above the baseline raise the debt ratio by about 2.5 percentage points in 2030 and about 16 percentage points by 2040; the corresponding effects of nominal growth being 1 percentage point lower are about 6 and 23 percentage points, respectively.

Morgan Stanley lowered its forecast for US debt as a share of GDP in 2030 from about 144% a year ago to 133%, but raised its 2040 forecast by about 3 percentage points to 170%. The bank expects nominal US GDP growth of 5.8% in 2026, temporarily supporting the debt ratio.
The bank expects the US primary deficit to widen to about 3.6% of GDP from 2028 onward; as nominal growth falls back and the average cost of debt rises, the cost of debt will exceed nominal growth in the early 2030s. Its calculations use gross federal debt and assume discretionary spending grows broadly in line with nominal GDP.
To stabilize debt, the bank estimates that the primary deficit must narrow to about 0.3% of GDP in 2030 and turn into a primary surplus of about 1.5% by 2040, an adjustment substantially larger than in the baseline forecast.

Japan’s debt ratio is high, but a recovery in nominal growth provides a buffer. Morgan Stanley expects debt as a share of GDP to fall from about 205% in 2025 to about 194% in 2030; meanwhile, the cost of debt is expected to rise to about 3.0% in 2040, above last year’s forecast of 2.2%.
France faces difficulties narrowing its deficit, and interest-rate assumptions have a major effect on the outcome. The baseline uses the average forward interest rate over the past 12 months and projects a debt ratio of about 145% in 2040; using the average forward interest rate for October 2026 instead, with other conditions unchanged, would raise the debt ratio to about 156%.
The UK’s downward path depends on its fiscal plans: the baseline assumes a primary surplus of about 1.5% of GDP by 2030 and a debt ratio falling to about 81% by 2040; if the primary balance were 2 percentage points weaker than the baseline, the debt ratio would reach about 113% in 2040.
Italy’s primary surplus and stronger nominal growth help keep its debt ratio at about 134% to 136% before 2030, but the bank expects long-term debt costs to exceed growth and the debt ratio to rise to about 150% in 2040.