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Topic updates

Maximum sustainable debt

Geoff Riley

16th July 2016

Here is a new concept to me but one relevant to year 2 macroeconomic debates about the scale of sovereign debt owed by developed and developing countries.

At the close of 2015, the sovereign (national) debt-to-GDP ratio stood at 243% in Japan, 105% in the United States, 92% in the Eurozone & 90% in the UK.

According to this paper published in VoxEu, a country’s maximum sustainable debt depends on its maximum primary budget surplus and on its ability to roll over its debt from year to year. Japan has a huge sovereign debt to GDP ratio but their bond yields remain extremely low not least because of the strong preference among Japanese savers to fund the borrowing of their own government. This suggests that Japan has a higher maximum sustainable debt than countries such as Italy, Portugal and (naturally enough) Greece.

The UK government under the new stewardship of Chancellor Phillip Hammond will develop a revised macroeconomic policy in the weeks and months to come. With long-term government bond yields at historic lows, many economists would argue that this is now the time to borrow at negative real interest rates to help fund much needed critical infrastructure projects and help avoid a post-Brexit recession.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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