Saturday 22nd October 2016

Resource Clips

Visual Capitalist: By this measure, the U.S. has the second-highest national debt

by Jeff Desjardins | posted with permission of Visual Capitalist | September 25, 2015

By this measure, the U.S. has the second-highest national debt

USA is #7 in debt to GDP, but #2 in debt to revenue

In absolute terms, the United States is the most indebted country in the world, accounting for 29% of the world’s $60 trillion of sovereign debt.

However, this is not really a fair comparison in some ways because it does not account for the relative wealth of the country in contrast to poorer economies. That’s why it is standard practice to measure sovereign debt in a ratio comparing it directly to the economic productivity, measured by gross domestic product (GDP).

Using this ratio in comparison with other OECD countries, the United States is a modest seventh place (out of 34) in the rankings in terms of its debt load. However, as Jeffrey Dorfman writes in Forbes, comparing debt and GDP has considerable problems.

The major issue is that economic production cannot be converted directly to dollars that a government can spend. If this were true, a government could claim everyone’s income as taxes and use it to pay down the debt. However, in reality, a 100% tax rate would make everyone quit their jobs or leave the country. That’s why it makes more sense to compare a government’s debt to the actual tax revenue collected, as this creates a clearer picture of the country’s debt burden and capacity to pay.

We pulled the latest data from the OECD to compare three ways of measuring the amount of debt that a country has accumulated. The first is the standard debt-to-GDP ratio. In addition, we looked at debt to revenue (this includes all federal, state and municipal tax revenue) as well as debt to central government revenue (this excludes state and municipal tax revenue). The data from the OECD database is from 2013.

When tabulated using all three measures, the world debt picture changes significantly. The United States is seventh in debt to GDP with a ratio of 103%, but it jumps to fourth place (406%) in terms of debt to revenue and then second place (979%) in terms of debt to central government revenue. In other words, when it comes to the actual capacity to pay down this debt, the United States is the second-most indebted country in the world. Even if the federal government theoretically used all tax revenue to pay down debt (not including any interest), it would take 10 years.

Of course, the United States also has the world’s reserve currency for now, which gives it more flexibility with its debt and monetary policy. This is less true for a country like Greece, where the currency cannot be devalued at all so long as the country is a part of the EU.

How do other major countries do when comparing the regular measure to the new one using revenue? Canada jumps five spots to fifth place with 695% and Germany jumps nine spots to sixth place. The UK drops five spots down to 16th overall with 351%. Australia rises two spots from 30th to 28th.

Posted with permission of Visual Capitalist.

Share |

View All: News Stories