title: A Critical Examination of the Debt-to-GDP Ratio and Its Implications for Policy-Making in Selected OECD Eonomies, Between 1995 and 2015
Creators: name: Rummelhoff, Victoria
Publisher: name: Griffith University
Year: 2018
Subjects: subject: OECD economies
subject: Debt-to-GDP ratio
subject: Policy making
subject: Economic growth
subject: Fiscal policies
subject: Sustainable debt
subject: 1995 to 2015

description: The debt-to-GDP ratio is the most reported debt index by institutional, and the predominantly quantitative literature on sovereign debt relies heavily on the GDP-ratio, as it allows for cross-country analysis and generalisation of theoretical conclusions, regardless of differences in the size of economies and currency denominations of debt. However, these aspects are unlikely to be valuable for national policy-makers. Economies with the same debt-to-GDP ratio levels can have very different underlying economic and fiscal dynamics that impact repayment capacity and debt sustainability, due to distinctive combinations of economic structures, fiscal balances, taxation rates, government assets and qualitative debt portfolio features. Ultimately, some economies can sustain a much higher debt-ratio levels compared to others. Therefore, the research problem explored here is how universal the debt-to-GDP ratio really is, and how can it effectively assist policy-makers and promote sustainable fiscal and debt policies if it is not universal? By answering these two questions: what are the limitations of the GDP-ratio; and how influential is the GDP-ratio within policy-making, this research addresses two gaps in the literature. Firstly, the lack of critical investigation of the debt-to-GDP ratio; and secondly, highlighting the level of influence and value of the measurement within governmental policy-making and institutional analysis and assistance. Overall, the two questions allow this research to highlight how economic, fiscal and qualitative debt portfolio features decreases the measurement’s universal nature, and to answer the overarching question: how accurate and valuable is the debt-to-GDP ratio from a policymaking perspective? This research is pragmatic and uses a mixed-method case-study approach to combine quantitative macroeconomic data between 1995 and 2015 and qualitative interview data to investigate the debt-to-GDP ratio measurement in Greece, Ireland, Norway and Australia. Additionally, the research investigates the perceptions and use of the measurement within the IMF, the World Bank and the UN. The research uses qualitative analysis methods, including analytical comparisons, pattern matching, and parallel demonstrations, as well as fundamental mathematical calculations, to disclose a combination of quantitative and qualitative limitations and inaccuracies of the debt-to- GDP ratio measurement. The interview data collected from governmental and institutional representatives supports and supplements the quantitative data findings, while determining the level of influence and value the measurement within policymaking. The key findings show that four areas produce limitations in the debt-to-GDP ratio, that challenge the accuracy and value of the GDP-ratio measurement for policy-making. Firstly, there are inaccuracies in the debt-to-GDP ratio’s ability to portray monetary debt trends, due to comparative growth rates in the nominal GDP and debt, and fluctuations in commodity prices and demand. Secondly, different objectives underlying government borrowing impacts the sustainability of GDP-ratio levels in different economies. Thirdly, the debt-to-GDP ratio inaccurately portrays debt relative to repayment capacities, due to variations in budget balances and total and taxation revenue-ratio levels; disparities in the governments’ non-taxation revenue flows demonstrating different reliance on taxation revenues within their total revenues; and different growth rates in taxation revenues compared to nominal GDP among the case-study economies. Fourthly, the GDP-ratio lack insight into the maturity, interest-rate and external debt compositions of economies’ debt portfolios, which greatly impacts the repayment capacity and the insightfulness of the debt-to-GDP ratio in relation to debt sustainability. Combined, the limitations and inaccuracies and the different economic, fiscal and qualitative debt portfolio dynamics demonstrates that the measurement is not universal across countries nor static over time. In general, the interview data show that the debt-to-GDP ratio can be valuable to assess long-term debt trends and projections in comparison to economic growth trends; however, it is not valuable for short-term, budget and debt policy formulations. This is due to the country-specific and general limitations of the measurements, that decreases the usefulness and reliance on the measurement as a policy and analysis tool. The key practical implications of this research are that the GDP-ratio measurement needs to be assessed in combination with a range of measurements to be able to effectively ensure sustainable fiscal and debt policies. The key theoretical implication establishes that research using the GDP-ratio needs to take into account country-specific economic and fiscal features and qualitative debt portfolio aspects. By grouping together countries with similar quantitative and qualitative features, regional institutions can develop more appropriate guidelines to promote increased economic and fiscal security, while theories can develop more accurate debt-to-GDP ratio denominated conclusions for different country groups. Additionally, this research finds that the GDP-ratio may not be the optimal measurement to determine the impact of high debt on economic growth.