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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.

View on FRED, series used in this post: CPALTT01JPA661S, CPALTT01USA661S, DEUCPIALLAINMEI, GBRCPIALLAINMEI, GGGDTADEA188N, GGGDTAGBA188N, GGGDTAITA188N, GGGDTAJPA188N, GGGDTAUSA188N, IRLTLT01DEM156N, IRLTLT01GBM156N, IRLTLT01ITM156N, IRLTLT01JPM156N, IRLTLT01USM156N, ITACPIALLAINMEI, NYGDPPCAPKDDEU, NYGDPPCAPKDGBR, NYGDPPCAPKDITA, NYGDPPCAPKDJPN, NYGDPPCAPKDUSA, SPPOPGROWDEU, SPPOPGROWGBR, SPPOPGROWITA, SPPOPGROWJPN, SPPOPGROWUSA

How expensive is it to service the national debt?

A battle between interest rates and growth rates

The U.S. federal debt has been rising steadily since the Great Recession and is currently 103 percent of GDP. So let’s enlist FRED to help us study the sustainability of this debt by looking at how much it costs to service it.

Neil Mehrotra recently described the cost of servicing public debt as dependent on the gap between the real interest rate on debt and the growth rate of real GDP: This gap captures the difference between the interest the government must pay to its lenders, in real terms, and the pace at which U.S. income increases. If U.S. income increases more rapidly, then interest payments on U.S. debt shouldn’t be a major burden.

The graph plots this measure of the cost of servicing the debt. (Here, the growth rate of real GDP is the sum of real GPD per capita growth and population growth, and the real interest rate is the difference between the interest rate on a 10-year Treasury bond and the CPI inflation rate.) The graph presents an interesting picture. In the years since the Great Recession, the cost of servicing public debt has been negative, which means that the burden of U.S. public debt is low. Since 1960, negative debt servicing costs have occurred nearly 63 percent of the time; and the average cost of servicing debt is -0.67%. In fact, since the 1960s, the only time period in which the real interest rate was consistently greater than the growth rate of real GDP was from 1981 to 1995.

Interest rates have been low since the previous recession, but they have been on an upward trajectory lately, which may increase the cost of servicing the federal debt.

How this graph was created: Search for and select the series “Constant GDP per capita for the United States.” From the “Edit Graph” panel, set the frequency to “Annual.” Then add three more series in this order to the same line: “Population Growth for the United States,” “10-Year Treasury Constant Maturity Rate,” and “Consumer Price Index for All Urban Consumers” (all at anual frequencies). Set the units for constant GDP per capita to “Percent Change from Year Ago” and the units for CPI inflation to be “Percent Change.” Then, in the Formula bar, enter the formula c-d-a-b.

Suggested by Asha Bharadwaj and Maximiliano Dvorkin.

View on FRED, series used in this post: CPIAUCNS, GS10, NYGDPPCAPKDUSA, SPPOPGROWUSA


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