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Global debt surged by almost $29tn to a record $348tn last year, according to an influential think-tank that expects the burden to worsen in the coming years as governments increase spending on areas such as defence.

The Institute of International Finance said on Wednesday that governments’ investments in national security were the primary driver behind last year’s $28.8tn rise, with spending on AI and similar technologies also contributing to what was the biggest annual increase in the global debt burden since the Covid-19 pandemic.

The IIF figures, which combine the debt burden for governments, companies and households, also showed that, as a share of global output, global debt ratios declined for a fifth consecutive year to around 308 per cent of GDP. The debt-to-GDP ratio is seen as a vital indicator of borrowers’ capacity to honour their obligations.

However, the trade body for the banking industry cautioned that the decline in ratios was down entirely to lower burdens for the private sector, with government borrowing as a proportion of output continuing to rise.

Gordon Shannon, fund manager at TwentyFour Asset Management, said the figures were “another reminder” that while “eyes” are on corporate AI issuance to fund surging capital expenditure, “it’s governments who are really driving supply”.

Record levels of sovereign debt issuance have helped to push up borrowing costs for many countries in recent years, exacerbated by many central banks rolling back their vast bond-buying programmes since the Covid pandemic.

This has been reflected in a broad rise in countries’ 10-year bond yields, with the US and UK hovering around 4 per cent. Even for Germany, viewed as the Eurozone’s ultra-safe benchmark borrower, the equivalent debt has risen from a negative yield a few years ago to more than 2 per cent.

Longer-term borrowing costs, which are more influenced by anxiety over bond supply, have risen faster than shorter-term rates, in a “steepening” of government yield curves.

A mix of defence-driven fiscal expansion, lower interest rates and lighter touch regulation of the financial sector could drive a greater build-up in debt in the coming years, the IIF warned.

Governments in Europe, which have upped their spending on defence amid geopolitical tensions exacerbated by US President Donald Trump’s return to the White House, could see their debt-to-GDP levels rise by more than 18 percentage points by 2035, according to the IIF’s projections.

Trump, who demanded that European members of Nato increase their defence spending to 5 per cent of GDP, has also pledged to raise spending on US defence by around $500bn to $1.5tn by 2027.

The IIF said governments in major emerging economies were also seeing their debt burdens rise, especially in China, Brazil, Mexico and Russia.