Most governments have some level of debt spending, which is often necessary for economies to invest in their people, finance critical expenditures, and fund infrastructure. However, when public debt rises too quickly or by too much, it becomes a burden. Today, as global debt levels climb to record highs, analysts are sounding the alarm. The debt to GDP ratio is a key indicator of a country's fiscal health, with higher ratios signaling more money spent on interest payments on debt. .
Global public debt is projected to cross $100 trillion by 2025. After a brief decline in 2021-22, it rose again in 2023 and is expected to reach nearly 100% of global GDP by 2030, led primarily by China and the US.
In this edition of Chart of the Week, we take a look at the government debt-to-GDP ratios of various countries.
India’s debt to GDP improves from its pandemic peak
India's debt to GDP ratio surged to nearly 88% in 2020-21 from around 74% in 2019-20, due to the economic fallout from the COVID-19 pandemic. The nationwide lockdowns led to a recession, with two consecutive quarters of negative growth. However, debt levels have since declined to 82% in 2024. Finance Minister Nirmala Sitharaman emphasized that India’s debt-to-GDP ratio is now below that of many other emerging markets.
The United States, in January 2023, exceeded its debt limit of $31 trillion, with the debt to GDP ratio reaching 122.3%, up from 108.1% in March 2020. The pandemic played a major role in this increase, with the ratio peaking at 133.8% in March 2021 due to extensive government spending on stimulus packages and addressing the public health crisis.
US debt exceeded $31 trillion in January 2023, raising concerns about breaching the $31.4 trillion ceiling. However, a new debt limit bill passed in June 2023, raised the ceiling and prevented a default. The debt ceiling is the maximum amount of debt the US government can borrow. Since 1960, the US government has increased the ceiling seventy-nine times, most recently in 2023. Forty-nine of these increases were implemented under Republican presidents, and twenty-nine under Democratic presidents. Both political parties in the US, the Democrats and the Republicans, have got into the habit of promising heavy spending and more tax cuts to win elections. This may please voters, but it has resulted in the US being increasingly unable to have a balanced budget. In the current presidential election race, Harris has made commitments that would add $3.5 trillion to the US debt, while Trump’s promises would increase it by $7.5 trillion.
Japan, US and UK see soaring debt levels
The United Kingdom recently rejoined the unfortunate “100% debt to GDP ratio club” after 60 years, with a ratio of 100.1% as of August 2024. The UK’s debt has been increasing since the pandemic due to rising costs post-Brexit, energy subsidy schemes, inflation-linked benefit payments and interest payments on debt.
In contrast, France has experienced a downward trend in debt since the pandemic, despite rising social security costs and an aging population. However, public debt approached 112% of GDP between April and June, leading to a credit downgrade from S&P earlier this year. This rise in debt is due to lower-than-expected tax revenues and delayed hiring and investment by companies, along with local and regional administrations exceeding their spending plans.
Moving on to Asian countries. Japan has the highest debt in the world at over 250% of GDP, especially worrying considering its slow growth and a declining population. However, Japan’s situation is less dire than it appears because the public sector holds substantial assets. The Bank of Japan owns domestic government bonds amounting to about 100% of GDP, effectively reducing the country’s net liabilities. This internal borrowing makes the debt more stable, as Japan doesn’t rely as heavily on foreign creditors. By early 2024, Japan's net debt excluding its internal debt, was around 119% of GDP, making it comparable to US debt levels when considering this asset ownership.
China's debt to GDP ratio among the lowest
China’s yearly debt to GDP ratio is at 83.6%, one of the lowest among the countries in focus. However, the debt to GDP ratio has been rising since the pandemic, as local authorities have borrowed heavily to boost a slowing economy. As a result, the economy's debt to GDP ratio has increased steadily over the last four years.
Turning to countries with lower debt to GDP ratios, Brazil's ratio reached 78.5% in August 2024, surpassing the threshold limit of 77%. This increase could lead to a 1.7 basis point decline in annual real growth for each percentage point of debt. However, Brazil has decreased its debt to GDP ratio by about 12.2 percentage points since the pandemic, thanks to stronger-than-expected economic growth (2.9%) in 2023, the appreciation of the Brazilian currency against the U.S. dollar, and net debt redemption.
As of March 2024, Germany's debt to GDP ratio stands at 63.6%, having remained stable over the years. However, the pandemic led to a sudden increase of 9 percentage points. The finance ministry anticipates a slight rise this year, with the ratio projected to reach 64% by the end of this year, before gradually declining until 2028. This increase is attributed to the planned Generational Capital, a new pension scheme aimed at maintaining pensions in line with wage trends.
While many governments rely on debt for development, rising debt levels pose significant challenges. Countries like the US and Japan are facing high debt-to-GDP ratios, raising concerns about fiscal sustainability. As global public debt is projected to exceed $100 trillion by 2025, monitoring these trends is crucial for the stability of the global economy.
