Debt-to-GDP Ratio: Formula and What It Can Tell You

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’s ability 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.

Formula and Calculation of the Debt-to-GDP Ratio

The debt-to-GDP ratio can be calculated by this formula:

$\begin{aligned} &\text{Debt to GDP} = \frac{ \text{Total Debt of Country} }{ \text{Total GDP of Country} } \\ \end{aligned}$​Debt to GDP=Total GDP of CountryTotal Debt of Country​​

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.

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 in economic growth. Every percentage point of debt above this level reduces annual real growth by 1.7%.

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:

1. Japan: $1.15 trillion
2. China, Mainland: $770.7 billion
3. United Kingdom: $710.2 billion
4. Luxembourg: $384.4 billion
5. Canada: $338.2 billion
6. Cayman Islands: $319.4 billion
7. Belgium: $312.4 billion
8. Ireland: $307.6 billion
9. France $276.5 billion
10. Switzerland $272 billion

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.