18 Nov 2011

Talk of government debt is now everywhere thanks to the ever evolving Eurozone crisis. So we thought that it might be interesting to have a look at some interesting debt dynamics.

Taking a step back from the Eurozone crisis things aren't so rosy with the rest of the industrialised world either. The World Competitiveness Center of Swiss business school IMD has produced a new study that highlights how 'old' industrialised nations will suffer from a 'debt curse' that could last a lot longer then many people think. They define 'bearable' public debt as 60% or less of GDP and have then estimated how long it will take a number of industrialised nations to achieve this target (based on the sunny assumptions that they can devote 1% of GDP to the repayment of debt, reduce their budget deficits to reach equilibrium by 2015 and that by 2015 each nation resumes an average GDP rate equivalent to that from 2000 to 2009). Based on these assumptions the 10 nations with the longest time horizons for escaping the 'debt curse' are: Japan (2084), Italy (2060), Portugal (2037), Belgium (2035), U.S. (2033), Iceland (2032), Greece (2031), France (2029), Germany (2028) and U.K. (2028).

So what makes up government debt? As the Economist explains it "There are two things that matter in government-debt dynamics. The difference between real interest rates and GDP growth (r-g), and the primary budget balance as a % of GDP (ie, before interest payments). In any given period the debt stock grows by the existing debt stock (d) multiplied by r-g, less the primary budget balance (p)."

Not a macro-economist? Don't want to do all those calculations yourself? Don't worry! Thankfully they have also made things easier for us with their interactive debt dynamics calculator that plots general government debt as a percentage of GDP based on current IMF projections. The interactive part comes in with an option to select what countries you want to look at and to alter the basic economic assumptions that have gone into the IMF forecasts. By playing around with inflation or interest rates you can see just how good or bad things could get. Click on 'show user forecast' and give it a try and see where things might be headed....

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