Question

A heavily indebted government may end up in a vicious circle, where higher interest rates and lower growth exacerbate the debt burden.

a. Derive an expression for how the change in the government debt-to-GDP ratio depends upon the primary deficit (relative to GDP), the earlier debt-to-GDP ratio, the interest rate and the GDP growth rate.

b. By how much will the government debt ratio increase in a year if the outstanding debt is 100 per cent of GDP, the primary deficit 10 per cent of GDP, the interest rate 2 per cent and the GDP growth rate 1 per cent? What primary fiscal balance is required to stabilize debt?

c. Consider a country similar to Greece in 2013. Assume that the existing debt is 160 percent of GDP, the primary deficit 3 per cent of GDP, the interest rate 10 per cent and the GDP growth rate−4 per cent. Compute the annual growth in the debt-ratio in this economy. What primary fiscal balance is required to stabilise debt?

Answer 1

Answer:-

1) In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.Geopolitical and economic considerations – including interest rates, war, recessions, and other variables – influence the borrowing practices of a nation and the choice to incur further debt. It should not be confused with a deficit-to-GDP ratio, which, for countries running budget deficits, measures a country's annual net fiscal loss in a given year (total expenditures minus total revenue, or the net change in debt per annum) as a percentage share of that country's GDP; for countries running budget surpluses, a surplus-to-GDP ratio measures a country's annual net fiscal gain as a share of that country's GDP.

At the end of the 3rd quarter of 2019, United States public debt-to-GDP ratio was at 105.5% . The level of public debt in Japan was 246.1% of GDP, in China 16.7% and in India 61.8%, in 2017 according to the IMF, while the public debt-to-GDP ratio at the end of the 2nd quarter of 2016 was at 70.1% of GDP in Germany, 89.1% in the United Kingdom, 98.2% in France and 135.5% in Italy, according to Eurostat. wo thirds of US public debt is owned by US citizens, banks, corporations, and the Federal Reserve Bank.approximately one third of US public debt is held by foreign countries – particularly China and Japan. Conversely, less than 5% of Italian and Japanese public debt is held by foreign countries.Particularly in macroeconomics, various debt-to-GDP ratios can be calculated. The most commonly used ratio is the government debt divided by the gross domestic product (GDP), which reflects the government's finances, while another common ratio is the total debt to GDP, which reflects the finances of the nation as a whole.

2) Here the scenario is if the outstanding debt is 100 per cent of GDP, the primary deficit 10 per cent of GDP, the interest rate 2 per cent and the GDP growth rate 1 per cent .The  primary balance is. the fiscal balance excluding net interest payments on. general government liabilities (i.e. interest payments. minus interest receipts).The fiscal balance is the amount of money that a government receives from tax revenue and the proceeds of assets sold, minus any government spending. When the balance is negative, the government has a fiscal deficit. When the balance is positive, the government has a fiscal surplus.Sep 7, 2018

Primary fiscal deficit =primary deficit+government interest payments

=10/100+2/100=12/100=0.12 %

Fiscal and debt sustainability is (mostly) about maintaining . The debt-stabilizing primary balance initial debt, the greater the primary surplus/deficit needed.

The primary budget balance, defi ned as the budget balance net of interest payments, is a key determinant of government debt dynamics. Stabilising the government debt-to-GDP ratio and subsequently putting it on a declining path towards the reference value requires a suffi ciently large primary surplus to be generated over an extended period of time if the interest rate-growth differential is positive, as conventionally assumed.2 The expected substantial rise in age-related public expenditure over the coming decades will make this objective challenging, but also increasingly urgent.

3) The Greek government-debt crisis was the brief sovereign debt crisis faced by Greece in the . Even in 2013, Greece had the second-biggest defense spending in NATO as a percentage of GDP, after the US. Pre-Euro, currency devaluation .

In the European Union, most real decision-making power, particularly on matters involving politically delicate things like money and migrants, rests with 28 national governments, each one beholden to its voters and taxpayers. This tension has grown only more acute since the January 1999 introduction of the euro, which binds 19 nations into a single currency zone watched over by the European Central Bank but leaves budget and tax policy in the hands of each country, an arrangement that some economists believe was doomed from the start.

Since Greece’s debt crisis began in 2010, most international banks and foreign investors have sold their Greek bonds and other holdings, so they are no longer vulnerable to what happens in Greece. (Some private investors who subsequently plowed back into Greek bonds, betting on a comeback, regret that decision.)

And in the meantime, the other crisis countries in the eurozone, like Portugal, Ireland and Spain, have taken steps to overhaul their economies and are much less vulnerable to market contagion than they were a few years ago.

The Greek government-debt crisis was the brief sovereign debt crisis faced by Greece in the ... Even in 2013, Greece had the second-biggest defense spending in NATO as a percentage of GDP, after the US. Pre-Euro, currency devaluation . Greece is reaching a milestone in one of the most ruinous financial crises to hit Europe. On Monday, the country will officially end its reliance on over 320 billion euros, or about $360 billion, of bailouts, opening a path to a new era of financial independence.Greece's GDP growth has also, as an average, since the early 1990s been higher than the EU average. However, the Greek economy continues to face significant problems, including high unemployment levels, an inefficient public sector bureaucracy, tax evasion, corruption and low global competitiveness.

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