I’ve been trying to figure out a better way to rate a country’s debt besides the usual Debt/GDP.
First I’d replace the misleading GDP with total revenue.
Second and most important I’d subtract a country’s government assets from it’s debt. Suppose country A and country B both had a trillion in debt. Country A has no assets but country B has 20 trillion in gold bullion. It makes no sense to rate them equally.
So my new formula is (Debt - Assets) / Revenue. Very simple. The US debt is 14 trillion, our revenue is around 2 trillion and I have no idea how much are assets are, lets say 2 trillion. That would make the formula (14-2) / 2 or 6 / 1. I think that would be much more accurate than debt/GDP. The only problem is I can’t find any stats on country balance sheets or assets. Only debt. I’m pretty sure for example that Japan actually has more in assets than debt which makes their debt rating a lot better than it is normally stated.
But the reason debt/GDP is used is because government revenue isn’t some more-or-less fixed number, like an individual’s income from wages or interest. A government can easily increase its revenue by raising taxes and usurping more of the private sector in order to pay off the government debt.
krazy kaju: “But the reason debt/GDP is used is because government revenue isn’t some more-or-less fixed number, like an individual’s income from wages or interest. A government can easily increase its revenue by raising taxes and usurping more of the private sector in order to pay off the government debt.”
I know what you are saying but in reality most governments are pretty close to maxing out their tax revenue. As the other poster mentioned the Laffer curve comes into play.
More importantly do you think that assets need to be taken into consideration?