How does US debt compare to that of other major countries?
National debt refers to the total amount of money that a government owes to its creditors with the level a constant challenge for fiscal policy to manage.
Governments borrow money by issuing bonds or other forms of debt securities in order to finance their spending on various programs, such as public infrastructure, healthcare, and social welfare. When a government spends more money than it collects in revenue from taxes and other sources, it runs a budget deficit, which must be financed through borrowing.
Over time, this can lead to a buildup of national debt, as the government accumulates more and more outstanding bonds and other forms of debt. This debt is measured as a percentage of a country’s gross domestic product (GDP), which represents the total value of all goods and services produced within a country’s borders.
A high national debt-to-GDP ratio can be a cause for concern, as it may indicate that a government is borrowing too much and may struggle to repay its debts in the future. That hasn’t stopped nations like Japan from racking up huge public debt more than twice its GDP, but confidence in the Japanese economy keeps them afloat.
For a comparison of nations we are going to use one of the international economic bodies the US is involved in: the G7. The US has the largest GDP in the G7, which is a group of nations which combined produce half of the world’s wealth. It has been criticised for being a sort of ‘old boys;’ economic group, containing nations like Italy and Canada that are becoming increasingly irrelevant in discussions of the global economy.
Regardless, analysing the GDP-to-debt ratio shows interesting differences in economic management:
There are two extremes at work: the nations running far under 100%, namely Germany and Britain, and the nations running over, Italy, the US and Japan. As mentioned earlier, Japan’s debt is an incredible anomaly that has been described by Reuters as a “ticking debt time bomb.” An ageing society has increased social security spending without the necessary number of workers available to plug the gaps.
So let us refocus on the US again. While nowhere near as high a debt as Japan, US debt is still larger than what the country can produce in a year. Debt by itself is not a worry, if creditors can be paid off then there isn’t a risk of economic problems. Larger debts do mean that a greater amount of spending in a year is used to pay interest, but there is no imminent risk of financial collapse.
This is where the debt ceiling danger comes in. Should the US default on its debt payments, namely being unable to pay the creditors mentioned above, then trust in the world’s bank falters. Foreign national banks would not be as willing to invest their money in the US, inevitably leading to a financial crisis as nations rush to pull out their investments. In a word: chaos.
As long as this debt is managed then there is no major risk. The US’s closest partner in debt levels is Italy, which has done a bad job of balancing the books. While their debt ratio is nominally the same as the US, Italy has nowhere close to the reliance or trust in the economy compared to the US. Their high debt has led to sluggish growth and falling living standards.
Tackling public debt
There are two main ways of tackling public debt for large economies, fiscal discipline and economic growth. The former involves implementing policies that reduce government spending and increase revenue through measures such as tax increases and cutting of budgets. Another word for this is austerity. This is a key policy for the British government from 2010 onwards, leading to the slashing of money from public services.
The other is economic growth. A growing economy will increase government revenue through taxes and other sources, while also reducing the burden of debt by increasing the size of the overall economy relative to the debt.