What Is the Debt-to-GDP Ratio?
The debt-to-GDP ratio is a metric that compares a country's public debt to its gross domestic product (GDP). It reliably indicates a country’sability to pay back its debts by comparing what the country owes with what it produces. The debt-to-GDP ratio is often expressed as a percentage and it can also be interpreted as the number of years necessary to pay back debt if GDP is dedicated entirely to debt repayment.
Key Takeaways
- The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product.
- The ratio can also be interpreted as the number of years it would take to pay back debt if GDP was used for repayment.
- The higher the debt-to-GDP ratio, the less likely it becomes that the country will pay back its debt and the higher its risk of default.
- Default could cause a financial panic in the domestic and international markets.
Formula and Calculation of the Debt-to-GDP Ratio
The debt-to-GDP ratio can be calculated by this formula:
DebttoGDP=TotalGDPofCountryTotalDebtofCountry
A country that's able to continue paying interest on its debt without refinancing and without hampering economic growth is generally considered to be stable. A country with a high debt-to-GDP ratio typically has trouble paying off external debts, also called public debts. These are any balances owed to outside lenders. Creditors are apt to seek higher interest rates when lending in such scenarios.
Extravagantly high debt-to-GDP ratios may deter creditors from lending money altogether.
What the Debt-to-GDP Ratio Can Tell You
It often triggers financial panic in domestic and international markets alike when a country defaults on its debt. The higher a country’s debt-to-GDP ratio climbs, the higher its risk of default generally becomes.
Governments strive to lower their debt-to-GDP ratios but this can be difficult to achieve during periods of unrest such as wartime or economic recession. Governments tend to increase borrowing to stimulate growth and boost aggregate demand in such challenging climates. This macroeconomic strategy is attributed to Keynesian economics.
Economists who adhere to modern monetary theory (MMT) argue that sovereign nations capable of printing their own money can't ever go bankrupt because they can simply produce more fiat currency to service debts. This rule doesn't apply to countries that don't control their monetary policies, however, such as the European Union (EU) nations that must rely on the European Central Bank (ECB) to issue euros.
Good vs. Bad Debt-to-GDP Ratios
World Population Review has reported that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns ineconomic growth. Every percentage point of debt above this level reduces annual real growth by 1.7%.
The U.S. debt-to-GDP for Q4 2023 was 121.62%, almost double early 2008 levels but down from the all-time high of 132.96% seen in Q2 2020.
The U.S. has had a debt-to-GDP of more than 77% since Q1 2009. The U.S.’s highest debt-to-GDP ratio before that year was 106% in 1946 at the end of World War II.
Debt levels gradually fell from their post-World War II peak before plateauing between 31% and 40%in the 1970s. Ratios have steadily risen since 1980. They jumped sharply following 2007’s subprime housing crisis and the subsequent financial meltdown. Ratios then spiked during the COVID-19 pandemic to reach new highs and have only slightly come down since then.
Special Considerations
The U.S. government finances its debt by issuing U.S. Treasuries which are widely considered to be the safest bonds on the market.
The countries and regions with the 10 largest holdings of U.S. Treasuries as of April 2024 were:
- Japan: $1.15 trillion
- China, Mainland: $770.7 billion
- United Kingdom: $710.2 billion
- Luxembourg: $384.4 billion
- Canada: $338.2 billion
- Cayman Islands: $319.4 billion
- Belgium: $312.4 billion
- Ireland: $307.6 billion
- France $276.5 billion
- Switzerland $272 billion
What Is the Main Risk of a High Debt-to-GDP Ratio?
High debt-to-GDP ratios could be a key indicator of increased default risk for a country. Country defaults can trigger financial repercussions globally.
How Does Modern Monetary Theory View National Debt?
Modern monetary theory (MMT) suggests that sovereign countries don't have to rely on taxes or borrowing for spending because they can print as much as they need. Their budgets aren't constrained such is the case with regular households so their policies aren't shaped by fears of rising national debt.
Which Countries Have the Highest Debt-to-GDP Ratios?
Japan had the highest debt-to-GDP ratio of 264% as of 2024. Next is Venezuela at 241%, followed by Sudan at 186%.
The Bottom Line
The debt-to-GDP ratio is a metric that helps understand a country's ability to pay back its debts. A lower debt-to-GDP ratio is generally ideal because it signals a country is producing more than it owes, placing it on a strong financial footing.
FAQs
The debt to GDP ratio is calculated by dividing a country's total debt by its GDP. A lower debt-to-GDP ratio indicates the country is generating enough income through its economic activities to pay its debts.
What does the debt-to-GDP ratio tell us? ›
The debt-to-GDP ratio is a metric that compares a country's public debt to its gross domestic product (GDP). It reliably indicates a country's ability to pay back its debts by comparing what the country owes with what it produces.
What is the formula for debt ratio Why is debt ratio important? ›
A debt ratio measures the amount of leverage used by a company in terms of total debt to total assets. This ratio varies widely across industries, such that capital-intensive businesses tend to have much higher debt ratios than others. A company's debt ratio can be calculated by dividing total debt by total assets.
What is the debt-to-GDP ratio quizlet? ›
The debt-GDP ratio measures government debt as a percentage of GDP. This measure recognizes that the size of the economy as a whole, as measured by GDP, provides information about the amount of potential taxes a government can collect.
What are two ways the debt-to-GDP ratio can increase? ›
Explanation: Two ways the debt-to-GDP ratio can increase are: Debt increases: If the country's debt grows, the ratio will rise. GDP decreases: If the GDP shrinks, even if the debt stays the same, the ratio will increase.
What is a bad debt to GDP ratio for a country? ›
a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio.
Why is US debt to GDP ratio so high? ›
One of the main culprits is consistently overspending. When the federal government spends more than its budget, it creates a deficit. In the fiscal year of 2023, it spent about $381 billion more than it collected in revenues. To pay that deficit, the government borrows money.
What is a good debt ratio? ›
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
How to tell if a company has too much debt? ›
Debt ratios must be compared within industries to determine whether a company has a good or bad one. Generally, a mix of equity and debt is good for a company, though too much debt can be a strain. Typically, a debt ratio of 0.4 (40%) or below would be considered better than a debt ratio of 0.6 (60%) or higher.
What should debt to ratio be? ›
35% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills. 36% to 49% means your DTI ratio is adequate, but you have room for improvement. Lenders might ask for other eligibility requirements.
The target most commonly referenced is a 60% debt-to-GDP ratio. Despite the uncertainties surrounding the debt, there are a few things of which we can be sure: The rising debt reflects an imbalance between tax and spending policies.
What is the debt-to-GDP ratio now? ›
Interactive chart of historical data comparing the level of gross domestic product (GDP) with Federal Debt. The current level of the debt to GDP ratio as of June 2024 is 121.57.
What is debt-to-GDP ratio math? ›
A country's debt-to-GDP ratio is calculated by dividing its total public debt by its gross domestic product. The result can be expressed either as a percentage (more common) or a numeral (less common).
What does debt-to-GDP ratio tell us? ›
Generally, a higher Debt to GDP ratio indicates a government will have greater difficulty in repaying its debt.
What happens if U.S. debt gets too high? ›
Rising debt means fewer economic opportunities for Americans. Rising debt reduces business investment and slows economic growth.
Which country has the highest debt in the World Bank? ›
India takes the top spot. The world's most populous country owed $38.3bn to the WB at the end of 2022, down by almost $1.5bn from a year earlier. India's outstanding balance is almost double that of the next biggest debtor, Indonesia, with $20.6bn.
Which country has the highest debt to GDP ratio? ›
Virtually every other major government across the world has aggressively tapped into global debt markets.
- Japan has the highest debt-to-GDP ratio at 255%. Its national debt has floated above 100% of its GDP for more than two decades.
- China's national debt is above 80 percent of its GDP, according to IMF data.
At high debt levels, governments have less capacity to provide support for ailing banks, and if they do, sovereign borrowing costs may rise further. At the same time, the more banks hold of their countries' sovereign debt, the more exposed their balance sheet is to the sovereign's fiscal fragility.
Who does the US owe the most money to? ›
Who does the United States owe the most debt to? As of July 2020, Japan overtook China and became the largest foreign debt collector for the U.S. The United States currently owes Japan about $1.2 trillion according to the U.S. Treasury report.
How much does the US owe China? ›
China is one of the United States's largest creditors, owning about $859.4 billion in U.S. debt. It doesn't own the most U.S. debt of any foreign country, however. Nations borrowing from each other may be as old as the concept of money.
