Debt-To-GDP Ratio

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What is the 'Debt-To-GDP Ratio'

The debt-to-GDP ratio is the ratio of a country's public debt to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. Often expressed as a percentage, the ratio can be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

BREAKING DOWN 'Debt-To-GDP Ratio'

Economists have not identified a specific debt-to-GDP ratio as being ideal, and instead focus on the sustainability of certain debt levels. If a country can continue to pay interest on its debt without refinancing or harming economic growth, it is generally considered to be stable. A high debt-to-GDP ratio may make it more difficult for a country to pay external debts, and may lead creditors to seek higher interest rates when lending.

If a country is unable to pay its debt, it defaults, which could cause a panic in the domestic and international markets. The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default. While governments may strive to have low debt-to-GDP ratios, government borrowing may increase in times of war or recession; this is a macroeconomic strategy attributed to Keynesian economics.

Debt-to-GDP Patterns in the United States

The United States had a debt-to-GDP ratio of 104.17% in 2015 according to the U.S. Bureau of Public Debt. The United States experienced its highest debt-to-GDP ratio in 1946 at 121.70%, and its lowest in 1974 at 31.70%. Debt levels gradually fell from their post-World War II peak before plateauing between 31 and 40% in the 1970s. They have been rising steadily since 1980, jumping sharply following the subprime housing crisis of 2007 and subsequent financial meltdown.

The U.S. government finances its debt by issuing U.S. Treasurys, which are considered the safest bonds on the market. The countries with the 10 largest holdings of U.S. Treasurys are Taiwan at $182.3 billion, Hong Kong at $200.3 billion, Luxembourg at $221.3 billion, the United Kingdom at $227.6 billion, Switzerland at $230 billion, Brazil at $246.4 billion, Ireland at $264.30 billion, the Cayman Islands at $265 billion, Japan at $1.147 trillion and Mainland China at $1.244 trillion.

Global Debt-to-GDP Ratios

The average debt-to-GDP ratio among Organisation for Economic Co-operation and Development (OECD) countries in 2015 was expected to be 111.2%. A number of countries had a debt-to-GDP ratio in 2015 that was over 100% including Belgium at 105.4%, France at 116.1%, Greece at 188.2%, Ireland at 132%, Italy at 147.4%, Japan at 232.5%, Portugal at 142.2%, Spain at 111.5% and the United Kingdom at 103.1%.

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