As a General Rule, What Percentage of Debt to GDP Should a Country Have?

According to a World Bank study, nations with debt-to-GDP ratios that are consistently higher than 77% see their economies grow at noticeably slower rates. Specifically, countries lose 0.017 percentage points in economic growth for every percentage point of debt that is higher than this amount.

As a general rule, the question arises: what percentage of debt to GDP should a country have? This article provides some useful data on the topic. It includes Government debt held by the public, the share of total debt in the financial sector, and the amount of government debt not aggregated across subsectors. These data also show what percentage of a country’s debt is in the form of loans.

Interest payments on the stock of debt as a ratio to GDP

Interest payments on the debt stock as remuneration of GDP is a measure of the sustainability of debt. The lower the r is relative to GDP, the more sustainable the debt is. However, there are many complexities in the relationship between r and GDP. Therefore, this ratio should be as low as possible. But if it is too low, the debt will not be sustainable.

The United States is projected to spend $393.5 billion on interest payments this fiscal year, or about 8.7% of all federal outlays. In the mid-1990s, debt service was more than 15% of federal outlays. Today, interest payments on the stock of debt as a proportion of GDP are lower than they were then, thanks to low-interest rates. But if we are realistic, the interest payments must grow even more in the coming years, which may lead to double-rate rises.

Before the 2008 global financial crisis, countries were already building up large amounts of debt. As a result, the level of global public debt in 2007 was much higher than in 2008, before the Great Recession. Several commodity-exporting nations were particularly hard-hit by the turmoil. During that time, global public debt exceeded its level in GDP by 23 percentage points. By 2015, the proportion of public debt in advanced economies rose to 105 percent of GDP. The ratio rose even higher in emerging and lower-income countries, where the share was as low as fourteen percent.

Debt-to-GDP is a measure of a country’s ability to pay its debts. It is expressed in percentages and can be interpreted as the number of years that a country will take to pay off its debts. The higher the ratio, the more risky the country is of default. As such, the debt-to-GDP ratio should be lower.

Government debt held by the public

If you are concerned about the country’s debt, the ratio of government debt to GDP is the critical question. Unfortunately, since 1980, the public debt has consistently increased, except for the Carter and Clinton administrations. Currently, public debt is at 106 percent of GDP, far higher than the current rate of 105 percent. However, several factors can help to determine the proper debt ratio.

The gross debt of the United States is the total amount of debt held by the public. This includes government debt and Treasury securities issued to special government funds. As of September 2016, the U.S. government held over $5.47 trillion in Treasury securities, with the most significant balances being held by the Social Security, Military Retirement, Civil Service Retirement, and Highway Trust Fund. The ratio between government debt and gross GDP is not directly comparable but is helpful as a guideline for understanding how government borrowing relates to GDP.

The percentage of debt held by the public is based on the total amount of Treasury securities issued to the public. This includes debt issued to the Federal Reserve, corporations, and state and local governments. This includes TIPS and non-marketable Treasury securities. In addition, the government accounts for Social Security and Medicare are considered part of the debt held by the public.

The ratio between government debt and GDP is a better indicator of financial health than the nominal debt, which merely shows the size of the public’s debt compared to total economic output. This is because it allows us to compare fiscal situations apples to apples. After all, large debts, even if held by the public, are less problematic than high nominal dollar debt. For instance, the debt held by the public in 1946 was only $242 billion, or one percent of the current total.

Share of total government debt held by the financial sector

The share of total government debt held by the financial sector as a proportion of GDP was low in most countries and variable in others. In Europe, the financial sector held a high proportion of overall government debt in Spain, Portugal, and Italy. However, in most countries, the financial sector held less than 5 percent of total government debt. In the United States, non-residents held the largest share of total government debt.

Public debt often referred to as “national debt,” is a significant economic problem. The amount of debt held by the government is often higher than the national income, which means that it harms the economy. However, debt can serve as an economic “shock absorber” by keeping government services going even when the economy is facing a recession. Moreover, debt can also cover the costs of significant events, such as a war or a major pandemic.

Non-financial sectors are also major debt holders in many countries. In Hungary, for instance, non-financial corporations (Non-Profit Institutions) account for more than half of all government debt. In Ireland, household and government-sponsored enterprises also hold large amounts of government debt. For a country to hold large amounts of debt, it must be relatively wealthy to make a lot of money.

The net total of federal government debt and financial assets is an additional measure often referred to as the “government net of financial assets.” This number gives a more comprehensive view of the federal government’s finances. However, because of the lack of data on non-financial assets, this measure is difficult to calculate and does not accurately reflect the government’s leverage. The share of total government debt held by the financial sector as a general rule is about half the national government debt.

Share of total government debt not consolidated between subsectors

To calculate a country’s public debt, a measure must be used to group all government financial obligations. This is done by combining all debts the general government and subsectors hold. Consolidation is also referred to as Maastricht debt. In other words, consolidated measures show a country’s total debt, while non-consolidated measures show only the government’s share of private debt.

In 2013, the European Commission released data showing the share of government debt not consolidated between subsectors. These data indicate that non-resident debt represents a substantial share of total debt in the several EU Member States. The highest percentages were held by countries like Czechia, Sweden, and Denmark. In contrast, the rest of the world sector was the most significant debt holder in countries like Norway, Estonia, Latvia, and Lithuania.

Compared to other subsectors, foreign currency debt represents only a tiny proportion of total government debt. The percentage of foreign currency debt among these countries ranged between five and nine percent. While the foreign currency debt among these countries is low, their total debt is higher than the share of all subsectors combined. In the United States, the percentage of foreign currency debt was over 20 percent, while that of non-residents was twenty-one percent.

Although the overall government gross debt is largely unconsolidated, some subsectors are more likely than others to have substantial amounts of short-term government debt. For example, domestic financial sector borrowing was previously classified as security credit liabilities. But now, it is included in the loans of securities brokers and dealers. As a result, that proportion rose to $962 billion in 2014-Q4.

Effects of excessive debt on the economy

Excessive debt can have devastating effects on the economy. As debt levels rise, so do asset prices. As a result, demand for goods and services increases. High debt levels can undermine economic growth by causing financial distress. Excessive debt can also trigger suboptimal transfers that hinder future economic growth. In addition to hurting future growth, excessive debt can boost current growth in unproductive ways and trigger unpredictable hysteresis.

Rising debt is a significant contributor to the gap between supply and demand. Rising debt requires adjustment mechanisms to restore equilibrium between supply and demand. However, these adjustment costs are imposed on vulnerable agents and slow economic growth. So, what are the effects of excessive debt on the economy as a general rule? Studying these mechanisms is crucial to understanding how excessive debt can undermine an economy. In the following, we look at some of them.

First, large government debt is bad for the economy. Large government debt also harms economic growth. This negative impact becomes more severe as debt increases. The worst effect of high government debt is the decline in GDP. Moreover, as government debt increases, so do the burden on society. Therefore, it is essential to study government debt levels to understand how much debt can affect economic growth.

Secondly, the cost of financial distress is higher in unstable economies. The costs of financial distress are related to the uncertainty associated with debt servicing. In addition, foreign businesses will likely liquidate assets or move abroad. A weaker economy is unlikely to absorb the same amount of debt. It is also important to note that foreigners are likely to be politically acceptable targets in some countries. Therefore, the consequences of excessive debt are worse in unstable economies.