Debt-to-GDP ratio
In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year).
[1] Geopolitical and economic considerations – including interest rates, war, recessions, and other variables – influence the borrowing practices of a nation and the choice to incur further debt.
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.
The debt-to-GDP ratio is technically not a dimensionless quantity, but a unit of time, 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),[3] 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, the United States public debt-to-GDP ratio was 127.5%.
[4] Two-thirds of US public debt is owned by US citizens, banks, corporations, and the Federal Reserve Bank;[5] 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.
[citation needed] One of the Euro convergence criteria was that government debt-to-GDP should be below 60%.
[7] High external debt is believed to have harmful effects on an economy.
[8] The United Nations Sustainable Development Goal 17, an integral part of the 2030 Agenda has a target to address the external debt of highly indebted poor countries to reduce debt distress.
[9] In 2013 Herndon, Ash, and Pollin reviewed an influential, widely cited research paper entitled, "Growth in a Time of Debt",[10] 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".
[11][12] Correcting these basic computational errors undermined the central claim of the book that too much debt causes recession.
[13][14] Rogoff and Reinhardt claimed that their fundamental conclusions were accurate, despite the errors.
The left side of the equation shows the change in the debt-to-GDP ratio.
The right hand side of the equation separates the effect of real interest rate
on previous debt-to-GDP, and the new debt or government budget balance-to-GDP ratio
[citation needed] If the government has the ability of money creation, and therefore monetizing debt the change in debt-to-GDP ratio becomes:
This inflationary effect from money printing is called an inflation tax.
