Public governance

Towards sustainable public finances

 

Government debt has risen since the crisis

Government debt has risen sharply in most OECD countries. The OECD-wide gross debt-to-GDP ratio increased from 73% of GDP in 2007 to 111% in 2013, which is the highest ratio since the aftermath of the Second World War. Taking into account various criteria, a new OECD study suggests that gross debt above about 80% of GDP has detrimental consequences for growth.

 

 

Debt per capita varies widely across countries

Between 2007 and 2013, the annual average growth rate of real government debt per capita in OECD countries was 6.7%, reaching an average of USD 42 863 PPP in 2013. Nonetheless, debt per capita varies widely, from USD 86 682 PPP in Japan to USD 3 839 PPP in Estonia.

 

Balance revenues and expenditures to guarantee the sustainability of public finances

Revenues raised by governments finance the provision of goods and services and carry out a redistributive role. The two main sources of government revenues are taxes and social contributions. While for a certain period of time additional revenue requirements could be financed by acquiring debt, in the long run, revenues and expenditures should be balanced to guarantee the sustainability of public finances.

 

Public expenditures have two main objectives: produce and/or pay for the goods and services delivered to citizens and businesses, and redistribute income. In addition, the amount of financial resources spent by governments provides an indication on the size of the public sector.

 

Consecutive fiscal deficits will increase debt levels

The fiscal balance is the difference between government revenues and spending. If in a given year, a government receives more than it spends, a surplus occurs. Conversely, when the government spends more than it receives in revenues, there is a deficit. Consecutive deficits will lead to mounting debt levels and consequently higher payments of interest.

 

Further reading:

Government at a Glance 2015

Achieving prudent debt targets using fiscal rules

 

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