So apparently pretty much every country in the world has a national debt that is ever increasing. Different elected governments try to enact savings to stall the debt growth with varying degrees of success, yet always the debt grows. Often I hear it said “we cannot afford these social changes, the national debt increase is not sustainable” etc.
So please, if you can to me how national debt works and what is too much?
In: Economics
Short anwser a country is in to much when it cant pay the debt back.
When that happens is diffrent for each country. But idealy we would want to know that it happens befor it happens, so we try to use diffrent metrics to figure out when it is likely that a country wont be able to repay its debts.
A few metrics are debt to gdp so how much debt has a country compared to the value the country produces each year. Another on is debt increase to gdp growth, so is the gdp growing faster than the debt is. If debt growth faster than the gdp that means without any changes the debt will at somepoint be to much for the economy of a country to handle. Another metric is debt payments to goverment budget, if the debt payments are a very big portion of the goverment budget that means it will most likely not be able to full fill other duties a goverment has, so it has to increase income (ie taxes). What is to much is very much debated and depents on a lot of thinks and there are no easy anwsers.
The probables how how much is too much is not the debt itself, but rather the payments on the debt. A country like the us can have higher debt than anyone else partially because the us can borrow at the lowest interest rate, so the payments themselves are lower. Usually national debt is done via bonds where the company pays the interest rate over time and then the remaining principle amount at the end, but instead of paying it off they just reissue it and keep making the interest payments and eventually with inflation the principle amount won’t matter.
How much is too much is an open question both economically and politically. If you’re spending 20% of your yearly tax revenue on just paying off debt that could be a lot of money that could be better spent elsewhere, on the other hand maybe you’re getting a good return on whatever you used that debt for in the first place. If you have too high debt the government has to pay more to that by either. Urging elsewhere or raising taxes, neither are generally good options.
First, let’s get over a misapprehension you have. Not every government is in debt, and not every government is increasing its debt. Many governments have worked to pay off their debt, it just doesn’t make headlines. My country’s debt peaked in the late 1990s, but has been decreasing ever since, only seeing brief deficits during the 2008 financial crisis and the 2020 COVID pandemic.
Now to the meat of your question. How much debt is too much? You’re not gonna like this answer: it depends. Generally speaking, any total debt below 100% of GDP is fine. It’s manageable. Above that, several factors begin to become relevant. First, interest. Some governments spend a substantial portion of their budget on just interest payments, while others spend barely a thing. If you can’t pay your interest, you’re screwed. That leads us nicely into point two: stability. If people are confident that your government isn’t about to go bankrupt, they’re more willing to lend you money, which in turn makes your “debt cap” higher. If you’re an unstable government with tenuous rule of law where your money might disappear at any second, you’re much less likely to receive loans. Third, the security of your economy. This ties into the first two points, but a larger and more diversified economy will have a lot more lenders than a petrostate, because their continued prosperity is mostly guaranteed, while the wealth of resource nations is dependent on the value of that one product.
Judging by your last point, I’m guessing you’re American. The American national debt concern is mostly overblown. Yes, the American government currently has a huge budget deficit, but America is also the largest and most stable economy in the world, probably in all of world history. There has never been a safer horse to bet on. Yes, social programs are expensive, but America has a huge tax potential (i.e. they can raise their taxes a lot more than other countries). The only limitations on the debt (you might’ve heard about the debt ceiling or a government shutdown) are political rules that can be withdrawn at will.
The short answer is “it’s a problem when the country is no longer able to make its debt payments on time”, and the longer answer is “well it depends on the country…”
You’ll sometimes see people suggest things like particular debt to GDP ratios or whatever as tipping points, but really if a country has a strong economy and investors are confident that the country will be capable of paying back the debts and interest, then they’ll generally be happy to continue to buy more of that debt regardless of any specific numbers.
For example, the US can get away with a large amount of national debt and investors are generally still confident that they’ll get paid back because the US economy is massive and generally strong and the US government has been very consistent in making payments on time. Smaller countries with smaller economies are typically seen as more risky because their smaller size makes them more vulnerable to global market conditions.
From what I understand debt isn’t a bad thing. The important thing is the interest.
That being said some nacions pay even 10% of their Budget to repay Debt
There has been cases where Debt is use to pay Debt ( this work if one has lower interest rates )
The country needs to be able to pay the interest on the debt. This is usually done by raising the taxes. When the taxes is too high the economy may collapse from this and you will be unable to pay the interest or even pay back the bonds when they are due. When there is a risk of this the banks that loan money to the government do not want to be the ones holding these debts when it happens. So they want to loan money to others instead. This means the government can not find people to loan them money so they will be unable to pay back the loans they already have. To prevent this the government will raise the interest rate making the banks more willing to loan money to them. However that means that the interest is higher so the taxes have to be higher to pay the interest.
This is kind of the issue here. A government defaulting on its debt is usually not triggered by there not being any money, but rather that the market fears that the country will default. So it becomes a self fulfilling prophecy. It can be very hard to predict when this will happen as it is based a lot of psychology of the analysts who tell the banks about their risks. One of the best indicators we have had is the debt to GDP ratio. The GDP of a country indicates how big the economy is and therefore how much tax the government can collect. A previous rule of thumb is that a country will default if the debt is higher then the GDP. And although no country have had so much debt before they all have crashed when it have been predicted that the debt gets that high. So it have been considered a fairly reliable indicator.
I am saying this in past tense though because the US debt passed the GDP without any indication from the market of any problem. And the debt continues to grow without any signs of slowing down. So there are apparently some exceptions to this rule, we just do not know exactly what this is.
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