Whilst people are hugely aware of the UK’s position of public debt to GDP ratio, many will not fully understand it. GDP is a measure of the total size and output of the economy. One measure of the debt burden is its size relative to GDP, called the “Debt to GDP ratio.” Mathematically, this is the debt divided by the GDP amount.To put it in simple terms public debt is the amount government owes compared to the amount it gains in revenue via taxes and other incomes.
Recent news has said that the USA now has a debt to GDP ratio of 105%. This is staggering as the worlds largest economy generates some $14 trillion over the course of a year. This is a number too large to even try to explain, what I am going to do is try to understand the reasons why the USA has such a large debt. First of all, some recent history:
Debt held by the public relative to GDP rose rapidly in the 1980’s. President Reagan lowered tax rates and increased military spending, while congressional Democrats held fast against attempts to reverse spending on social programs. As a result, debt as a share of GDP increased from 26.2% in 1980 to 40.9% in 1988, this continued to rise during the presidency of George H Bush, reaching 48.3% of GDP in 1992.
By the end of President Clinton’s term in office, debt to GDP has stabilised and reduced to about 34%. The reason for this was I suspect the up and coming Dot.Com bubble, which increased tax revenues massively. However, when the second Bush entered the White House, debt started to creep up again. It is widely believed that the reason is tax cuts that were put in place and again, huge military spending, mainly because of a fighting two wars in Afghanistan and Iraq, post 9/11 – then of course there was the global financial crisis – so by the end of 2008, public debt in the USA had doubled since 2001.
Towards the end of 2012, debt held by the public was approximately $11.5 trillion or about 72% of GDP. Intra-governmental holdings stood at $4.8 trillion, giving a combined total public debt of about $16.3 trillion. According to the U.S Debt Clock individual debt is currently at $188, 208 (on the 29/04/13), and $747,189 per family…
So where do they get all this money from? The markets..What are the ‘markets’ you ask. Well mainly countries borrow from financial institutions, such as banks and insurance companies, pension funds and of course foreign investors. It may not be widely known, but China “owns” over $1 trillion of USA public debt. Weirdly, the UK “owns” about $300 billion of USA public debt.
I will leave you with this: At present, the USA’s Federal Government expenditure is around 3.5 trillion dollars, the Federal tax income is 2.5 trillion dollars (accessed 29/4/13)… The mind boggles.
For an interesting way of seeing just how bad the US’ debt is, click this: US debt visualised in 100 dollar bills