Definition
Debt-to-GDP Ratio
The debt-to-GDP ratio compares the government's total outstanding debt to the size of the economy, a key gauge of fiscal sustainability.
Rather than the absolute debt number, the debt-to-GDP ratio shows whether a government's borrowing is manageable relative to its capacity to repay. A stable or falling ratio suggests sustainability; a rising one signals risk, especially if borrowing costs exceed growth.
The FRBM Review Committee recommended anchoring fiscal policy to a debt-to-GDP target rather than only an annual fiscal deficit number. Because the ratio depends on nominal GDP growth, strong growth can lower it even with continued borrowing, which is why growth and the primary deficit both matter.
Related terms
- Primary DeficitThe primary deficit is the fiscal deficit minus interest payments on past borrowings, showing the borrowing the government would need even if it had no legacy debt to service.
- FRBM ActThe Fiscal Responsibility and Budget Management Act is the law that commits the central government to fiscal discipline by setting targets for deficits and public debt.
- Fiscal DeficitThe fiscal deficit is the gap between the government's total spending and its total revenue, showing how much it must borrow in a year.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.