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September 28, 2010

National Debt Beyond 77% of total GDP starts to slow economic growth

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If a country’s public debt reaches 77 percent of its gross domestic product (GDP), bad things start to happen according to a study by North Carolina State University. There is a tipping point for national debt, and if you exceed that point the amount of debt will have a linear relationship to declines in economic growth. The more debt you have, the slower your GDP will grow.

If a country’s GDP is growing at a rate of three percent annually, and it increases its debt from 80 percent to 90 percent, its economic growth will shrink the following year to 2.8 percent.

The Congressional budget office is forecasting a debt ratio of 67% by 2020, but more realistic deficity forecasts show an extra 9 trillion in debt which pushes the debt ratio up to 110%. There would be a -0.56% drag on annual GDP growth.




The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points



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