Why do they quote govt debt as % of GDP?

[johnfm]

GDP is effectively the total output of the economy.

The government's ability to repay debt, like that of a homeowner with a mortgage, depends on it's income. IN the case of the govt, its total tax receipts.

Back in 1974:
tax take was £31.1billion (34.5% OF gdp)
govt debt was £53.7 billion (59.7% of GDP)

debt is 1.72 x tax receipts

AS you can work out, GDP was £90 Billion back then.

Roll forward to 2009/10:

tax recipts £476 billion (34% GDP)
debt £1014 billion (71.9% GDP)

debt is now 2.57 x tax receipts

GDp £1460 Billion


I can only assume Greek debt is a much higher multiple of the actual tax receipts - which is why, though their deficit is similar to ours in terms of %GDP, they are in the st.

Figures from https://www.hm-treasury.gov.uk/psf_statistics.htm

therefore they probably neglect off balance sheet pfi debt and, probably, the unfunded pension hole.

[Plotloss]

If you earned £10K a month and you went to a strip club and spent £6000 would it sound better to say

He spent 5% of his annual salary on women of the night

or

He spent £6000 on strippers?

Its all about perception.

[Pesty]

[johnfm]

Plotloss said:

If you earned £10K a month and you went to a strip club and spent £6000 would it sound better to say

He spent 5% of his annual salary on women of the night

or

He spent £6000 on strippers?

Its all about perception.

Are you suggesting these hypothetical strippers are wasted government expenditure or worthwile govt investment??

[i'm no superhero]

The correct A Level Economics exam answer is because it allows for international comparisons.

[johnfm]

But it doesn't allow comparison - if two countries have identical GDP, but one has much higher tax receipts than the other, the govt abilty to pay the debt is different.

[i'm no superhero]

johnfm said:

But it doesn't allow comparison - if two countries have identical GDP, but one has much higher tax receipts than the other, the govt abilty to pay the debt is different.

Yes, of course.

However, it is a figure which currency speculators use to predict the strength of an economy, which is why it is a highly important statistic for international trade.

If there is a high percentage of government debt, then it is indicative of a few things;

• (Obviously) High borrowing, to pay for JSA due to high unemployment, a non-progressive taxation system, a poorly organised fiscal policy, and so on.

• Lower tax revenues. Lower tax revenues due to higher unemployment (lower income tax revenue, people are spending less presumably so less VAT revenue, etc.)

• Confidence in an economy. If there is huge Government debt, then there is less confidence in an economy. In turn, depreciates the currency, obvious repurcussions.

Those are just three reasons of the top of my head. If you get in to political economy, you can explore the idea that high levels of debt are die to the Keynesian idea that during a recession you should spend your way out (an economy runs on 'animal spirits' and so on) which is what Labour followed, compared to classical (i.e. Conservative) ideas which say you should have massive cuts to reduce get out of a recession.

Ultimately it is an indicator, nothing more, which is used by currency speculators which determine a country's international performance if it is a free floating FOREX market. You're right in what you say, but it isn't really relevant as it is just a measure and nothing more.

It is like saying why is CPI used for headline inflation rather than RPI/RPIX/RPIY - they're just indicators...

Edited by i'm no superhero on Thursday 13th May 00:25