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Debt-to-GDP Ratio: What Does it Measure and What Doesn't It Say?
By Renaud Brossard - National Student Coordinator, Generation Screwed

There is this recurring criticism we hear at Generation Screwed regarding how we should use the debt-to-GDP ratio to calculate whether government debt is growing, rather than using its nominal dollar value. While the debt-to-GDP ratio is a commonly used measure and a good way to compare government debts across borders, it is a rather poor measure to look at a specific country’s debt as it has numerous flaws.

For starters, let’s look at what it calculates and why it can indeed be a useful tool for comparison. What the debt-to-GDP ratio does is calculate your ability to service your debt, or pay interests on it. Countries that have a low debt to GDP ratio for instance, will spend a smaller share of government revenues to service the debt, or won’t need very high taxes to cover such expenditures. The opposite is true as well. For instance, Greece, with a 175.1% debt to GDP ratio, has to spend nearly 17% of its total output, every year, just to keep the debt steady. To put it simply, what this means is that all economic activity in the country has to be taxed on average 17% just to pay for interests on the national debt. That does not cover infrastructure investments, program spending or any other general government operation.

Comparing government debt to GDP also allows for better comparisons between countries. For instance, while Greece’s debt, in US dollars, is much smaller than the United States federal government debt, Greece’s situation is much worse than the United States as its ability to service it is very different. That is not to say the US national debt is not a problem, it is just not as big as Greece’s for instance.

By accounting for government debt as a percentage of gross domestic product though, we let this debt potentially grow, and are forever condemned to waste money paying interests on the debt, rather than leave that money in taxpayers’ pockets, or spend it on social programs. Using this philosophy, taxpayers’ money will never exclusively be used either for taxpayers or by taxpayers, as a part of it will be wasted to pay for past excesses.

Don’t get me wrong, if our debt to GDP ratio is descending, it is much better than if it is growing, but it is by no means a panacea as it still means more and more taxpayers money is going in the pockets of financiers and bond-holders, rather than staying in taxpayers’ pockets. That is why Generation Screwed keeps fighting to put an end to government indebtedness, and why we don't use the debt-to-GDP ratio.

For more information:
Renaud Brossard - National Student Coordinator, Generation Screwed
phone: cell: email: rbrossard@generationscrewed.ca