US Will Hit 94% Debt to GDP Ratio Next Year, Surpassing the Level Where Debt Starts Reducing Economic Growth

Ambrose-Evans Pritchard notes:

Fitch expects the combined state and federal debt to reach 94pc of GDP next year, up from 57pc at the end of 2007. Federal interest costs will reach 13pc of revenues, meaning that an eighth of all taxes will go to service debt.

The figure of 94% is dramatic given that two top American economists – Carmen Reinhart and Kenneth Rogoff – wrote last month :

The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies…

Deficits do matter.

Note 1: Reinhart and Rogoff also make it clear that the larger the ratio of external to internal debt, the greater the drag on economic growth. The U.S. had a high level of external debt, although the Fed is now covertly monetizing much of the U.S. debt. So I’m not sure what the ratio of external versus internal debt really is at the moment.

Note 2: Fitch’s 94% figure includes state as well as Federal debt. I am not sure if this changes the above analysis.