DEBT TO REVENUE RATIO

Of recent, some analysts have argued that looking at debt in terms of government revenue is key because GDP does not really reflect all the resources to which governments have access. It is assumed that only a portion of GDP can be used by states to make debt-service payments.

In order to effectively service their debts, states need to increase their revenue. It sometimes doesn’t help that attempts to increase revenue — i.e., raise taxes — come with both political and economic downsides. Not only is raising taxes politically unpopular, but the act of collecting more revenue can actually cause economic growth and GDP to go down, since taxes act as a disincentive for economic activity.

As powerful as they are, states are constrained in their ability to raise taxes at will, and even if they gain the political will, raising taxes doesn’t mean more revenue will be collected. Thus, GDP by itself cannot really tell us how feasible it is for a state to handle its debt loads.