Ineconomics, thedebt-to-GDP ratio is theratio of a country's accumulation ofgovernment debt (measured in units of currency) to itsgross domestic product (GDP) (measured in units of currency per year). A low debt-to-GDP ratio indicates that an economy produces goods and services sufficient to pay back debts without incurring further debt.[1] Geopolitical and economic considerations – includinginterest rates,war,recessions, and other variables – influence the borrowing practices of a nation and the choice to incur furtherdebt.[2] Economists and international institutions caution that there is no universally agreed "safe" or "dangerous" debt-to-GDP threshold; the sustainability of public debt depends on factors such as growth prospects, interest rates, and fiscal institutions.[3]
It should not be confused with adeficit-to-GDP ratio, which, for countries running budget deficits, measures a country's annual net fiscal loss in a given year (government budget balance, or the net change in debt per annum) as a percentage share of that country's GDP; for countries running budget surpluses, asurplus-to-GDP ratio measures a country's annual net fiscalgain as a share of that country's GDP.
Particularly inmacroeconomics, various debt-to-GDP ratios can be calculated. The most commonly used ratio is thegovernment 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.
The debt-to-GDP ratio is technically not adimensionless quantity, but a unit oftime, being equal to the amount of years over which the accumulated economic product equals the debt.
According to the IMF World Economic Outlook Database (April 2021),[4] 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%.
At the end of the 1st quarter of 2021, theUnited States public debt-to-GDP ratio was 127.5%.[5]Two-thirds of US public debt is owned by US citizens, banks, corporations, and theFederal Reserve Bank;[6] 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.
Debt-to-GDP measures thefinancial leverage of an economy.[citation needed]
One of theEuro convergence criteria was that government debt-to-GDP should be below 60%.[7]
According to these two institutions[which?], 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".[8] High external debt is believed to have harmful effects on an economy.[9] The United NationsSustainable Development Goal 17, an integral part of the2030 Agenda has a target to address the external debt of highly indebted poor countries to reduce debt distress.[10]
In 2013Herndon, Ash, andPollin reviewed an influential, widely cited research paper entitled, "Growth in a Time of Debt",[11] by two Harvard economistsCarmen Reinhart andKenneth 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".[12][13] Correcting these basic computational errors undermined the central claim of the book that too much debt causes recession.[14][15] Rogoff and Reinhardt claimed that their fundamental conclusions were accurate, despite the errors.[16][17]
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 theforeign exchange market to foreign currency, which puts downward pressure on the value of its currency.
The change of debt-to-GDP ratio can be represented as:
, where is the debt-to-GDP at the end of the periodt, and is the debt-to-GDP ratio at the end of the previous period (t−1). The left side of the equation shows thechange in the debt-to-GDP ratio. The right hand side of the equation separates the effect ofreal interest rate andeconomic growth on previous debt-to-GDP, and the new debt or government budget balance-to-GDP ratio.[citation needed]
If the government has the ability ofmoney creation, and thereforemonetizing debt the change in debt-to-GDP ratio becomes:
The term is the change inmoney supply-to-GDP ratio. The effect that an increase in nominal money balances has onseigniorage 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 aninflation tax.[18]
