In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
, the debt-to-GDP ratio is the
ratio
In mathematics, a ratio shows how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ...
between a country's
government debt (measured in units of currency) and its
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
(GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured in units of year, and can be interpreted as the number of years a country needs to pay off its entire debt, if all its GDP is devoted towards it. A low debt-to-GDP ratio indicates that an economy produces goods and services sufficient to pay back debts without incurring further debt. Geopolitical and economic considerations – including
interest rates,
war,
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
s, and other variables – influence the borrowing practices of a nation and the choice to incur further
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
.
It should not be confused with a deficit-to-GDP ratio, which, for countries running budget deficits, measures a country's annual net fiscal loss in a given year (
total expenditures minus total revenue, or the net change in debt per annum) as a percentage share of that country's GDP; for countries running budget surpluses, a ''surplus-to-GDP ratio'' measures a country's annual net fiscal ''gain'' as a share of that country's GDP.
Particularly in
macroeconomics, various debt-to-GDP ratios can be calculated. The most commonly used ratio is the
government debt divided by the gross domestic product (GDP), which reflects the government's finances, while another common ratio is the total debt to GDP, which reflects the finances of the nation as a whole.
Changes
The change in debt-to-GDP is approximately "net change in debt as percentage of GDP"; for government debt, this is
deficit or (
surplus
Surplus may refer to:
* Economic surplus, one of various supplementary values
* Excess supply, a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determ ...
) as percentage of GDP.
This is only approximate as GDP changes from year to year, but generally, year-on-year GDP changes are small (say, 3%), and thus this is approximately correct.
However, in the presence of significant
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
, or particularly
hyperinflation, GDP may increase rapidly in nominal terms; if debt is nominal, then its ratio to GDP will decrease rapidly. A period of
deflation would have the opposite effect.
A government's debt-to-GDP ratio can be analysed by looking at how it changes or, in other words, how the debt is evolving over time:
The left hand side of the equation demonstrates the dynamics of the government's debt.
is the debt-to-GDP at the end of the period , and
is the debt-to-GDP ratio at the end of the previous period (−1). Hence, the left side of the equation shows the ''change'' in the debt-to-GDP ratio. The right hand side of the equation shows the causes of the government's debt.
is the interest payments on the stock of debt as a ratio of GDP so far, and
shows the primary deficit-to-GDP ratio.
If the government has the ability to
print money, and therefore
monetize the outstanding debt, the budget constraint becomes:
The term
is the change in money balances (i.e. money growth). By printing money the government is able to increase nominal money balances to pay off the debt (consequently acting in the debt way that debt financing does, in order to balance the government's expenditures). However, the effect that an increase in nominal money balances has on
seignorage
Seigniorage , also spelled seignorage or seigneurage (from the Old French ''seigneuriage'', "right of the lord (''seigneur'') to mint money"), is the difference between the value of money and the cost to produce and distribute it. The term can be ...
is ambiguous, as while it increases the amount of money within the economy, the real value of each unit of money decreases due to inflationary effects. This inflationary effect from money printing is called an
inflation tax.
Applications
Debt-to-GDP measures the
financial leverage
In finance, leverage (or gearing in the United Kingdom and Australia) is any technique involving borrowing funds to buy things, hoping that future profits will be many times more than the cost of borrowing. This technique is named after a lever ...
of an economy.
One of the
Euro convergence criteria was that government debt-to-GDP should be below 60%.
The World Bank and the IMF hold that "a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth". According to these two institutions, external debt sustainability can be obtained by a country "by bringing the net present value (NPV) of external public debt down to about 150 percent of a country's exports or 250 percent of a country's revenues". High external debt is believed to have harmful effects on an economy. The United Nations
Sustainable Development Goal 17, an integral part of the
2030 Agenda
The Sustainable Development Goals (SDGs) or Global Goals are a collection of 17 interlinked objectives designed to serve as a "shared blueprint for peace and prosperity for people and the planet, now and into the future".United Nations (2017) R ...
has a target to address the external debt of highly indebted poor countries to reduce debt distress.
In 2013
Herndon, Ash, and
Pollin reviewed an influential, widely cited research paper entitled, "
Growth in a Time of Debt",
by two Harvard economists
Carmen Reinhart and
Kenneth Rogoff. Herndon, Ash and Pollin argued that "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period".
Correcting these basic computational errors undermined the central claim of the book that too much debt causes recession.
Rogoff and Reinhardt claimed that their fundamental conclusions were accurate, despite the errors.
There is a difference between external debt denominated in domestic currency, and external debt denominated in foreign currency. A nation can service external debt denominated in domestic currency by tax revenues, but to service foreign currency debt it has to convert tax revenues in the
foreign exchange market to foreign currency, which puts downward pressure on the value of its currency.
Global statistics
At the end of the 1st quarter of 2021, the
United States public debt-to-GDP ratio was 127.5%.
[Federal Debt: Total Public Debt as Percent of Gross Domestic Product]
Federal Bank of St. Louis.
According to the IMF World Economic Outlook Database (April 2021),
[International Monetary Fund]
World Economic Outlook Database''General government gross debt''(Percent of GDP)
the level of Gross Government debt-to-GDP ratio in Canada was 116.3%, in China 66.8%, in India 89.6%, in Germany 70.3%, in France 115.2% and in the United States 132.8%.
Two-thirds of US public debt is owned by US citizens, banks, corporations, and the
Federal Reserve Bank
A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve ...
;
[
] approximately one-third of US public debt is held by foreign countries – particularly China and Japan. In comparison, less than 5% of Italian and Japanese public debt is held by foreign countries.
See also
*
Economic bubble
*
Debt levels and flows
*
Leverage (finance)
*
List of countries by public debt
*
List of countries by external debt
*
List of sovereign states by tax revenue to GDP ratio
References
{{Reflist
Debt-to-GDP ratio