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The cost of servicing public debt: An international comparison

In a previous blog post, we looked at the cost of servicing U.S. debt. The metric we used is the gap between the real interest rate on debt and the growth rate of real GDP. We perform a similar exercise here, but we add a selected sample of OECD countries: Germany, Italy, Japan, and the U.K. This mix is interesting because Italy and Japan have high ratios of government debt to GDP, while Germany and the U.K. have more moderate ratios, which are all shown in the graph above.

The dotted line represents the 100 percent mark. As of 2017, three countries in our sample have debt-to-GDP ratios greater than 100 percent of GDP:  Italy, Japan, and the U.S. The U.S. debt-to-GDP ratio started to rise with the onset of the Great Recession in 2007, while the ratios for Japan and Italy started to rise in the 1990s.

As noted above, we calculate the cost of servicing debt for these countries as the difference between the real interest rate (measured as the difference between the interest rate on 10-year government bonds and the CPI inflation rate) and the growth rate of real GDP (measured as the sum of real GDP per capita growth and population growth). The second graph shows that, in 2017, Italy had the highest cost of servicing its debt, followed by Japan and the U.S. However, all of these countries have a negative cost of servicing their debt, which implies that they have a low burden of debt, since the growth rate of the economy is greater than the real interest rate for each of these countries.


It’s also worth noting that in the recovery period after the Great Recession, only Italy and Japan had positive costs of servicing their debt. Population growth in these countries is very low or even negative, which increases the cost of servicing the debt according to this measure.

How these graphs were created: For the first graph, search for and select the non-seasonally adjusted series “General Government Debt for Italy.” From the “Edit Graph” panel, select the “Add Line” option and repeat the above step for Japan, Germany, the U.K., and the U.S.

For the second graph, search for and select the series “Long-Term Government Bond Yields: 10-year: Main (Including Benchmark) for the United States” and set the units to be “Percent” and frequency to be “Annual” (average). Then add three more series to this line: “Consumer Price Index: All Items for the United States” (with units set to “Percent Change”), “Constant GDP per Capita for the United States” (with units set to “Percent Change”), “Population Growth for the United States” (with units set to “Percent Change at Annual Rate”). Then, in the Formula bar, enter the formula a-b-c-d. In the “Add Line” tab, repeat the above steps for Germany, Italy, Japan, and the U.K.

Suggested by Asha Bharadwaj and Maximiliano Dvorkin.


Debt- and deficit-to-GDP dynamics

Several historical examples show that financial crises generate large increases in private and public debt that take many years and sometimes drastic measures to resolve. The recent global financial crisis, which began in 2007, was no exception: The public debt of the affected countries increased to levels not seen for decades.

During a recession, tax revenue falls because of the contraction of GDP and governments also increase spending. The combination of these two forces increases deficits, and debt-to-GDP ratios can rise quickly as a result.

This mechanism can be seen very clearly in these scatter diagrams: Debt-to-GDP ratios (vertical axis) and deficit-to-GDP ratios (horizontal axis) are shown for the United States (red dots), Japan (blue dots), and the euro area (green dots) for several years after 2001. The changes in the two ratios are more marked for the recent financial crisis than what would be seen for plain vanilla recessions (such as the U.S. recession in 2001) that are not associated with such crises. As the recession ended, the deficit ratios started to decline because tax revenue grew and primary deficits (excluding interest) contracted. But the debt ratios kept rising, in part because primary balances are still negative and in part because the burden of interest is now larger.

How this graph was created: Search for and select the appropriate series for central government debt for each country and then add the appropriate series for the deficit-to-GDP ratio. Select “scatter” for the graph type in “settings.” The width of the lines connecting the dots can be adjusted in the settings of the first series.

Suggested by Silvio Contessi

View on FRED, series used in this post: FYFSGDA188S, GFDEGDQ188S, GGGDTAEZA188N, GGGDTAJPA188N, GGNLBAEZA188N, GGNLBAJPA188N

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