Macroeconomics

Government Debt as

Government Debt as

Country

a Percentage of GDP

Country

a Percentage of GDP

Japan

173.0

Switzerland

48.1

Italy

113.0

Norway

45.4

Greece

100.8

Sweden

44.6

Belgium 92.2

Spain 

44.2

United States 

73.2

Finland

39.6

France

72.5

Slovak Republic

38.0

Hungary

71.8

Czech Republic

36.1

Portugal

70.9

Ireland

32.8

Germany

64.8

Korea

32.6

Canada

63.0

Denmark 28.4

Austria

62.6

New Zealand

25.3

United Kingdom

58.7

Iceland

24.8

Netherlands

54.5

Luxembourg

18.1

Poland

52.8

Australia 14.2

Source: OECD Economic Outlook. Data are based on estimates of gross government financial liabilities and nominal GDP

for 2008.

How Indebted Are the World’s Governments?

TA B L E

1 6 - 1

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amount of government debt for 28 major countries expressed as a percentage

of each country’s GDP. At the top of the list are the heavily indebted countries

of Japan and Italy, which have accumulated a debt that exceeds annual GDP. At

the bottom are Luxembourg and Australia, which have accumulated relatively

small debts. The United States is not far from the middle of the pack. By inter-

national standards, the U.S. government is neither especially profligate nor espe-

cially frugal.

Over the course of U.S. history, the indebtedness of the federal government

has varied substantially. Figure 16-1 shows the ratio of the federal debt to GDP

since 1791. The government debt, relative to the size of the economy, varies from

close to zero in the 1830s to a maximum of 107 percent of GDP in 1945.

Historically, the primary cause of increases in the government debt is war. The

debt–GDP ratio rises sharply during major wars and falls slowly during peace-

time. Many economists think that this historical pattern is the appropriate way

to run fiscal policy. As we will discuss more fully later in this chapter, deficit

financing of wars appears optimal for reasons of both tax smoothing and gener-

ational equity.

C H A P T E R   1 6

Government Debt and Budget Deficits

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