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Accumulation of budget deficits results in the accumulation of government borrowings. It is important to look at a country’s debt to GDP and interest payments to GDP ratios.
As long as an economy grows at a rate greater than the real interest rate, it can service its debt, but if real growth rate is lower than the real interest rate, a government’s debt to GDP ratio may worsen because the debt burden (real interest times real debt) may grow at a rate greater than economic output and tax revenues. When the price level increases, the real value of outstanding debt may fall, but if the price level decreases (i.e. there is deflation), the debt to GDP ratio may increase.
Reasons why we should not be concerned about high fiscal deficits and debt to GDP:
Reasons why we should not be concerned about high fiscal deficit and debt to GDP:
by Obaidullah Jan, ACA, CFA on Tue Feb 11 2020
This article can help you prepare for Reading 16 LOSq.