Thursday, 9 August 2012
Debt to GDP is misleading, your personal debt can't be measured against a collective measure such as the GDP so why should a governments debt be matched against it?
The figures shown are reasonable approximates which have been used due to conflicting numbers on various reports
Shown on the graph below is the United States yearly GDP, The amount of debt so far and the amount of the governments’ yearly income.
The debt is usually referred to as around 101% of the GDP. It is actually nearly seven years’ worth of government revenue and costing the US $1.2 Billion Daily a day in interest.
Countries like Greece, the UK, Ireland and Italy to name a few also have massively high debts and look at where they are now. The UK and the US are teetering on economic disaster and the others have had to be bailed out and are slashing services and pushing the cost of these disastrous debts onto their citizens, many of whom are in the process of losing everything. everything.
Debt to GDP is misleading, your personal debt can't be measured against a collective measure such as the GDP so why should a governments' debt be matched against it?
The figures shown are reasonable approximates due to conflicting numbers on various reports.
Shown on the graph below is Australia's yearly GDP, the amount of debt so far and the amount of the governments yearly income.
Countries like Greece, the US, The UK, Ireland and Italy to name a few once had a debt that at one point was only 30% of their GDP and look at where they are now. The UK and the US are teetering on economic disaster and the others have had to be bailed out and are slashing services and pushing the cost of these disastrous debts onto their citizens, many of whom are in the process of losing everything.
Wednesday, 6 June 2012
With accounting there are some very creative ways of presenting information in a way that can make something bad seem not so bad.
One of these creative ways of accounting that is accepted by reputable financial institutions and experts everywhere is the government debt to Gross Domestic Product (GDP) measurement.
This method is actually considered quite acceptable to use but isn’t the best representation of how things really are.
I have selected Australia and United States for this to help demonstrate how this creative accounting is used and what the real picture is. Both are major economies and have debt.
The figures used are approximates as various sites list the figures with some variation on the amounts. The amounts used however are close enough to help get the point I want to convey across.
In Australia the debt to GDP comparison is around 30% of GDP.
That puts Australia’s debt at around $250 billion compared to a GDP of around $1.23 trillion.
Doesn’t sound too bad does it?
The United States debt is around 15 trillion compared to a GDP of $14.58 Trillion. It’s slightly over 100% of GDP.
Not good but not hopeless right?
And remember, this is the accepted and respectable way of gauging debt and helping show possible impacts on the economies in question.
Thing is governments do not possess their countries entire yearly GDP, the governments actual revenue stream is only a small portion of it.
From the Australian GDP of around $1.23 trillion the Australian federal government ends up with around $250 billion.
From the United States GDP of around $14.58 trillion the United States federal government ends up with around $2.6 trillion.
A debt to revenue stream measurement is a much more realistic way of measuring debt. After all if you borrow money the amount you can borrow is measured against your own income which is the revenue stream at your disposal, not, for example, against a combined income figure such as the income of your neighbourhood or of the company you work for.
A GDP is a combined national income figure. Since no one person or entity has that combined amount at their disposal no one person, entity’s or governments borrowings should be measured against it.
Based on an actual ‘revenue in possession’ measurement Australia’s federal government debt is at 100% of actual revenue and the United States federal debt is around 500%.
Now the debts sound worse than the previously mentioned measurements against GDP don’t they? That’s because it is a more realistic presentation of the debts and of the real impact on their countries economies.
Which is more realistic and paints an honest picture of the current fiscal situation?
The Australian annual interest payments of over $5 billion measured against the GDP of $1.23 trillion or the Australian governments’ actual revenue of $250 billion?
And for the United States, annual interest payments of over $148 billion measured against the GDP of $14.58 trillion or the United States governments’ actual revenue of $2.6 trillion?
And that’s the interest only, to reduce the actual debt it costs much more.
Now what do you think the real impact is of the borrowings of governments is having on their nations’ economies and the world’s economy in general?
How many problems in Australia such as hospital waiting lists could $5 billion fix? Or maybe it could help fund the construction of much needed infrastructure.
What could $148 billion fix in the United States?
Despite what some would have you think these are massive sums of money. Sure it doesn’t sound much when you talk in the amounts of trillions of countries’ economies but the reality is these are substantial sums of money leaving with others getting the benefit, not the people it’s supposed to belong to.
Government debt is not a bad thing when the money is borrowed to get something needed such as a bridge or helping the economy during economic or natural disasters but care needs to be taken.
And while these debts mentioned here are technically 30% and 100% of GDP respectively they are realistically presented as 100% and 500% of actual available revenue and don’t include the debts of states and councils.
Include those debts and the money going towards them and it’s a wonder any money is left in our economies.