One indicator that economists use to measure the relative health of an economy is the national debt to GDP ratio. If this ratio is within an ideal zone, a country is set for growth. However, if the ratio is above a certain level, a country could suffer negative effects. This chart shows the US National Debt to GDP ratio by year since 1929.
National debt is fairly self explanatory. It’s the total debt a country owes to public and private parties. Governments issue debt to help pay for programs to stimulate economic growth, private investment and social programs, among various other items. Ideally a country’s tax revenues would be enough to cover expenditures, though often times deficit spending is necessary which increases the national debt.
GDP is measured as the Gross Domestic Product. This is the total value of all goods and services produced by a country. GDP growth is generally a good sign, as when it increases a country is growing. Growth typically implies jobs and investment into the country.
US National Debt to GDP Ratio by Year
The national debt to GDP ratio therefore measures a country’s debt vs its total output. Economists disagree where the ideal range for this ratio is. Ideally this ratio would be as close to zero as possible (ie – no national debt). However, most economists agree that some public debt is necessary to spur growth and investment.
The ideal range for this ratio is typically cited to be somewhere between 40-80%. Where a country falls on that scale depends on how developed they are, and what kind of debt is owed. After 80%, countries usually face a risk of adverse effects from the high levels of debt.
However, some debt is much more risky than others. For instance, foreign owed debt is much worse than internal debt (where the debt is held by a country’s own citizens.) Internal debt can be held by public citizens, but also can be held by social programs designed to pay citizens back (like social security).
As you can see in the chart, the US ratio has varied greatly over the last century. During World War II the ratio skyrocketed due to higher government spending as well as efforts to rebuild Europe such as the Marshall Plan. In the years following the ratio lowered due to spending cuts, as well as the US economy’s postwar boom.
In recent years the US ratio has greatly increased once again due to the 2008 global financial crisis and COVID-19 pandemic relief. This would suggest that in future years, taxes will need to increase, or spending lowered to help bring the ratio down to more reasonable levels.
Source: The Balance