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News Link • Government Debt & Financing

Forget Debt To GDP: Debt To Revenue Matters More, And U.S. Is The Worst

• Businessinsider.com/
 
Whatever the size of a government’s liabilities, what matters ultimately is how they compare to the resources available to service them. One benefit of sovereignty is that governments can unilaterally increase their income by raising taxes, but they will only ever be able to acquire in this way a fraction of GDP. Debt/GDP therefore provides a flattering image of government finances. A better approach is to scale debt against actual government revenues (see Exhibit 2). An even better approach would be to scale debt against the maximum level of revenues that governments can realistically obtain from using their tax-raising power to the full. This is, inter alia, a function of the people’s tolerance for taxation and government interference. Seen from this angle, the US federal debt no longer compares quite so favorably with that of European governments. And Morgan Stanley put together a chart to make that comparison. The U.S. position, relative to its ability to raise revenue, looks weak compared to Europe:

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