Analysis: How much debt should we have?
British Prime Minister David Cameron ponders. Time to pay down the debt? The U.K.’s public debt is equal to 90% of GDP compared to 42% in Colombia. (Getty Images)
By MAURICIO RODRIGUEZ MUNERA*
Channel: Economics, Latin American Affairs
Reasonable debt levels contribute to the rapid progress of families, business, and government. The moderate use of financial leverage – as a compliment to existing resources – has been, is, and will be an effective method of developing national economies, businesses, and family accounts.
Today we are on the verge of a major economic crisis precisely because we have ignored our common sense. Governments in particular – primarily those with the most powerful economies – increased their debts in the past decade at an exorbitant rate. Some of the wealthiest nations in the world have doubled their national debt in comparison to their GDP in the past ten years alone. In an effort to realize political ambitions, such credit was irresponsibly devoted to financing excessive government spending.
Now these governments are faced with serious difficulties in solving their severe fiscal problems and are being forced to make drastic – and extremely unpopular – changes in order to salvage their battered economies.
One very interesting investigation conducted by the Bank for International Settlements (BIS) devoted itself to deducing what the threshold is for when debt ceases to be a positive influence on the public welfare and instead becomes financially irresponsible and the source of many negative consequences. According to Stephen Cecchetti, one of the authors of the study, a government’s debt should not be greater than 100% of its nation’s annual GDP and ideally, debt would stay below 80% of the GDP. For private business, 90% is the threshold at which debt becomes a hindrance, and in the case of individual families, the number should not exceed 85%.
To better illustrate these suggested debt limits, we can compare data from two different countries: the United Kingdom and Colombia. In the case of the U.K., the threshold was exceeded in all three areas: government – 90%, business – 126%, and families – 106%. In Colombia, the situation is much different. According to the Colombian central bank (Banco de la República de Colombia), the government’s debt is only 42% of the annual GDP (almost half of what the BIS suggests in its study), business are at a mere 31% (only a third of the experts’ threshold), and family debt sits at a miniscule 13% of annual GDP (just one-eighth of the proposed danger level).
These figures demonstrate a general cautiousness on the part of the Colombian people to use credit lenders. So cautious in fact, that one might say that they have failed to take advantage of their ability to boost national economic growth. But considering the acute economic hardships that many countries are now facing due to their imposing debt levels, as compared to the financial peace of mind still being enjoyed in Colombia today, perhaps this timidity has been beneficial. Not only has it provided a state of economic stability for the present, but it has also allowed the future to look that much more attractive.
*Mauricio Rodríguez Múnera is the Colombian ambassador to the United Kingdom.
