In the last few years, however, this has changed dramatically. Rising government debt, and indeed, the economic health of several nations, is now at the center of the public policy debate. The results of the recent national election in Britain, was in part, a reflection of public dissatisfaction with the state of the economy and the growth in the level of debt under the Labour Party’s administration.
As long as deficits are kept at manageable levels and as long as the economy experiences growth, there is no need for concern. The question, of course, is what constitutes “manageable” and what level of economic growth is sufficient to honour the repayment of the debt? Economists prefer to compute a measure of debt as a percentage of Gross Domestic Product (GDP) because it is a reliable indicator that controls for the size of the economy. For example, if the U.K.’s debt is five percent of GDP in a given year and Denmark’s debt ratio is nine percent of GDP, we have a reasonably accurate means of examining the comparative debt level even though the economic output of each country is different.
The International Monetary Fund data shows that during most of the 1990s, the annual debt to GDP ratios for Britain and the United States averaged between three and five percent [http://www.imfstatistics.org]. This was considered acceptable because the economies of the two countries were growing at between four and six percent per year. In 2010, the Congressional Budget Office estimates the debt to GDP ratio for the US at 9.9% of GDP while economic growth is estimated at 3.2 percent [http://www.cbo.gov]. The Statistics Office estimates that the debt to GDP ratio for the U.K. in 2010 at 10.6% of GDP with economic growth forecast at 3 percent [http://www.statsitics.gov.uk]. The current debt to GDP ratios for both countries are clearly unsustainable. Warnings have recently been issued to the U.K. that the country’s credit rating may be lowered over fear