Government Debt Part 3: How Much is Too Much?
Good to Know
How Much Government Debt Is Too Much? In this, our final article in the series, we’ll review what experts and economists believe is an economically sustainable level of government debt.
Government Debt to GDP Ratio
A nation’s government debt to Gross Domestic Product (GDP) ratio puts government debt into context. Implicit in this formula is the expectation that robust and growing GDP will provide sufficient resources to service government debt and provide sufficient capital to businesses and private investors as well.
For example, assume a hypothetical country has $8 trillion in government debt and a GDP of $10 trillion. Dividing the former by the latter gives us a ratio of .80, or 80%. Translation—for every $1 of government debt, there is $1.25 of GDP. This ratio is considered by most as a sustainable level of debt.
Now, assume another hypothetical country’s government debt is $12 trillion and GDP is $4 Trillion. The government debt to GDP ratio would be 300%. For every dollar of government debt there would be only $0.33 in GDP. This ratio is far more likely to be unsustainable.
With this context in mind, we’ll consider this ratio for the United States of America.
U.S. Government Debt to GDP Ratio
The sharp rise of our government debt to GDP ratio from 2019 to 2020 was principally caused by fallout from COVID. Fears over face-to-face contact literally drove employees home to avoid the virus and businesses, especially brick-and-mortar retail businesses to suspend operations or close. What followed was inevitable. Our economy staggered into a recession since our GDP is driven primarily through consumer spending and consumer spending fell like a stone.1
The Federal government responded with emergency relief and recovery programs. While those responses prevented a more severe recession or—in the worst case— depression, the emergency relief programs were funded by more U.S. Treasury debt.
Summary
That begs the question, is our current level of government debt sustainable economically? The Congressional Research Service (CRS) recently noted, "There is not a consensus among economists about if or at what level a “tipping point” at which debt becomes unstainable would occur, but some estimates range from debt-to-GDP ratios of 80% to 200% and beyond.” The CRS position is echoed, at least in part, by an article from PENN-WHARTON that theorized a ratio of up to 200% is probably sustainable, but must be reduced within the next 20 years or sooner.
The author closes with a personal belief in U.S. exceptionalism. We’ve survived pandemics, recovered from economic depression, prevailed in world wars, and defended democracy against communism. If past is prologue, we’ll continue to survive and thrive. In the immortal words of Warren Buffet, “Never bet against America.”
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Caveat—the information in this article is based on current and future assumptions from experts about consumer spending, income tax rates, personal savings rates, inflation rates and more. Those assumptions may or may not hold true, and the conclusions may vary accordingly.
1 Consumer spending fell by 10% from 2Q-2019 to 2Q-2020.
The material contained in this article is to raise awareness—it is informational, general in nature and does not constitute financial advice. The material contained in this communication should not be relied upon or used without consulting a credentialed financial professional to consider your specific circumstances. This communication was published on the date specified and may not include any future changes in the topics, laws, rules or regulations covered.
