Debt-to-GDP Ratio: Formula and What It Can Tell You

What Is the Debt-to-GDP Ratio?

The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

Formula and Calculation of the Debt-to-GDP Ratio

The debt-to-GDP ratio is calculated by the following formula:

$\begin{aligned} &\text{Debt to GDP} = \frac{ \text{Total Debt of Country} }{ \text{Total GDP of Country} } \\ \end{aligned}$​Debt to GDP=Total GDP of CountryTotal Debt of Country​​

A country able to continue paying interest on its debt—without refinancing, and without hampering economic growth—is generally considered to be stable. A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called public debts), which are any balances owed to outside lenders. In such scenarios, creditors are apt to seek higher interest rates when lending.

What the Debt-to-GDP Ratio Can Tell You

When a country defaults on its debt, it often triggers financial panic in domestic and international markets alike. As a rule, the higher a country’s debt-to-GDP ratio climbs, the higher its risk of default becomes.

Although governments strive to lower their debt-to-GDP ratios, this can be difficult to achieve during periods of unrest, such as wartime or economic recession. In such challenging climates, governments tend to increase borrowing to stimulate growth and boost aggregate demand. This macroeconomic strategy is attributed to Keynesian economics.

Economists who adhere to modern monetary theory (MMT) argue that sovereign nations capable of printing their own money cannot ever go bankrupt, because they can simply produce more fiat currency to service debts; however, this rule does not apply to countries that do not control their monetary policies, such as European Union (EU) nations, who must rely on the European Central Bank (ECB) to issue euros.

Good vs. Bad Debt-to-GDP Ratios

A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods experience significant slowdowns in economic growth. Pointedly, every percentage point of debt above this level costs countries 0.017 percentage points in economic growth. This phenomenon is even more pronounced in emerging markets, where each additional percentage point of debt over 64% annually slows growth by 0.02%.

The U.S. has had a debt-to-GDP of over 77% since Q1 2009. To put these figures into perspective, the U.S.’s highest debt-to-GDP ratio was previously 106% at the end of World War II, in 1946.

Debt levels gradually fell from their post-World War II peak, before plateauing between 31% and 40% in the 1970s—ultimately hitting a historic 23% low in 1974. Ratios have steadily risen since 1980 and then jumped sharply following 2007’s subprime housing crisis and the subsequent financial meltdown. Ratios then spiked during the Covid-19 pandemic to reach new highs and have only slightly come down since then.

Special Considerations

The U.S. government finances its debt by issuing U.S. Treasuries, which are widely considered to be the safest bonds on the market.

The countries and regions with the 10 largest holdings of U.S. Treasuries (as of December 2023) are as follows:

1. Japan: $1.1 trillion
2. China, Mainland: $816.3 billion
3. United Kingdom: $753.7 billion
4. Luxembourg: $370.7 billion
5. Canada: $336.1 billion
6. Ireland: $332.3 billion
7. Belgium: $314.4 billion
8. Cayman Islands: $305.2 billion
9. Switzerland $287.6 billion
10. France $260.0 billion

The Bottom Line

The debt-to-GDP ratio is a metric that helps understand a country's ability to pay back its debts. Generally, a lower debt-to-GDP ratio is ideal, as it signals a country is producing more than it owes, placing it on a strong financial footing.