The Brave New World of Debt-to-GDP Ratio!

What is the Debt-to-GDP Ratio?

Simply put, it is the ratio of all the government debt carried by a country divided by the productive capacity of the country. This is similar to the debt-to-earnings ratio used to evaluate the financial worth of companies as well as individuals.

Typically if an individual or a company has a bad debt-to-earnings ratio they will find it tough to get a loan or attract investment. But debt-to-GDP doesn’t work the same way because not all countries are the same!

How does the Debt-to-GDP Ratio work?

Debt by itself is not bad. Similarly, a rising debt-to-GDP ratio may not be a bad thing. Why? Because borrowing is not bad if it leads to a growth in productivity. Productivity here is linked with one or more objective measures like income growth, we are not talking about subjective measures like ‘personal’ growth.

For example, if you as an individual borrow money to buy a car that you will drive as a taxi during the weekends as a second job, then while your debt has increased so has your income (assuming everything goes well). As long as your income (which can be used to measure productivity) increases faster than your debt, things will be fine. Obviously, individuals are limited by how much they can increase their income within the time frame of the borrowing. But when it comes to a country the limits are lot more relaxed. A country can always find productive uses for the money it borrows. Some examples include: strengthening infrastructure, improving education and improving connectivity (both national and international).

If productivity of an individual or a country increases faster than debt then they become an attractive target for future loans.

The flip side is more interesting! If a person spends the borrowed money in meeting day-to-day expenses then it is unlikely their income will rise faster than the debt, if it rises at all. Such an individual will find themselves in trouble very quickly with their creditors. When it comes to a country this logic starts to fail. Some countries end up attracting money even if things are bad all over. In fact, they keep attracting money even if they are not doing so well and are at the heart of a global financial crisis!

We can see this clearly in Figure 1 where USA and GBR (UK) have been borrowing heavily. Their debt-to-GDP ratio has a ‘step up’ right after both countries started borrowing to spend their way out of the 2008 Financial Crisis. The interesting thing is that this data is mostly till 2018 and we expect a similar (perhaps larger) ‘step up’ due to Covid-19 relief spending when we review the data for 2020!

Figure 1: Debt-to-GDP ratio for several countries and the Average debt-to-GDP ratio of major developed countries + India, China and South Africa

A Question of Trust

‘In God we Trust’ is the official motto of the USA. For the financial world it is ‘In the Dollar we Trust’. That explains why, where other countries have had massive backlash to high debt-to-GDP ratios in terms of no access to cheap borrowing, rating downgrades and currency devaluations we can see time after time, during a crisis, funds from all over the world flowing into the US financial system allowing it (the US govt.) to borrow cheaply! This is similar to how when facing a storm all fishing boats rush back into the harbour. This is one reason why it was relatively easy for the US to propose borrowing massive amounts of money (some $3 trillion) to support its economy through the Covid-related lockdown and beyond.

There is a similar narrative of stability and productivity around the UK. Always seen as a strong player in the world of financial services and second only to the USA in the financial sector. UK has similarly been borrowing a lot more without the corresponding growth in GDP. The first Conservative Government of David Cameron (2010 onwards) sought to stem the tide of borrowing by introducing ‘austerity’ and ending the massive spending spree of the previous government that was dealing with the 2008 financial crisis. There were all kinds of positive signs that despite the impact of Brexit on growth, the debt growth was coming under control and ‘austerity’ would end for good. All this was before Covid-related lockdown.

Only the data from 2020 will tell the scale of ‘step-up’ in the debt-to-GDP graph.

The Future

If you look at Figure 1 the debt-to-GDP ratio of all countries presented is heading only in one direction – ‘up’! It is either a gentle slop of a hill or a steep step of a plateau. As a point India (orange dots) may seem like the odd-one-out but that is not the case as in the recent budgets the Govt. has been forced to let the deficit widen (data is only till 2018) and also there are doubts as to the true figure of the Govt. debt.

The big tip of the iceberg question is ‘what happens next’? If the US/UK are the safe-harbours what happens when they become less and less safe, especially after Covid? Would that reduce their appeal? What ‘safe harbour’ will all that money seek? When does it become unsustainable? Who are the debt-holders who will take the decision to declare the situation unsustainable? Does a smaller population help in faster recovery?

To give an example, the cash rich economies like China, who have a massive surplus, behave like a fast-food chain. They want you to keep eating more of their food but also not fall ill. Their food is money and the delivery mechanism is through the world of finance. It is in their interest that their target markets are healthy so that they can continue buying from China. Where China cannot find a big market they plant the seeds of one by financing infrastructure projects to improve its access to trade routes. So it will be interesting to see how the net-exporting countries behave over the next 1 year. This also makes the current UK 5G ban on Huawei equipment very interesting.

Blast from the Past

As a final remark I need to mention what one of my favourite economists John Maynard Keynes said about this topic. Politicians remember the first half of his advice: it is fine to run a deficit (i.e. spend more than what you can earn) in times of great need (e.g. the Great Depression). But they forget the rest of his advice that the Govt. must balance the budgets during the times of plenty.

This is common sense. When you have good income levels it is logical to use that to reduce your debts so that in the time of scarcity you have a lower debt burden and more money left for your personal needs.

But this is also political suicide – no elected Govt. would survive if it told people that it was going into austerity mode when things were going well [1]. This is one of the big reasons we see a constant increase in debt-to-GDP across the world as shocks and crisis are never in short supply and it is unpopular to claw-back when things are going well. The thinking here is that if you grow your productivity (e.g. measured by income) fast enough you can always keep getting a bigger loan and stay one step ahead of the debt-collector.

Or if you are ‘big enough and transparent enough’ as a country, people will always be willing to lend to you (what else will they do with their money?).

Sources of Data:,,,


[1] Two examples where this did not happen from the World’s largest democracy India: demonetisation and maintaining high domestic fuel price when internationally crude oil prices have fallen. In both the cases strong steps were taken by the elected Govt. and they still came back to power with a larger majority. Unfortunately, in both the cases Govt. managed to loose the advantage gained from these tough steps due to mismanagement.

Let’s Not Waste a Crisis!

The ongoing COVID-19 related suppression of economic activity will impact incomes across the board. Irrespective of how the income is generated (e.g. business, employment, self-employment) the impact can be either positive, negative or uncertain.

  • Positive for those whose incomes are not disrupted or are increased due to demand (e.g. PPE manufacturers, health-care staff, delivery drivers).
  • Negative for those whose incomes have been disrupted without any relief in sight (e.g. restaurants, people who have been laid off with bad prospects for getting another job).
  • Uncertain for those who have been furloughed or laid off but with good prospects for getting a job.

With anything between 6-11% contraction predicted, the majority of the cases should fall in the ‘Uncertain’ category (I predict 4-7%) who will move to either Positive or Negative category over the next year or so.

Why do I say that?

I say it because there will be different responses to the challenges, from restructuring, process improvements to failing fast and even retraining/reskilling (both at individual level and at an organisational level). Depending on how effective a business is at transforming itself to survive, a lot of the people in the ‘Uncertain’ category will quickly transition to the ‘Negative’ category.

One of the main transformation patterns is to carry out process improvements/restructuring with increased automation so that costs decrease and production/service elasticity increases as incomes fall initially but then recover over the medium and long term.

This group of people who jump from Uncertain to Negative is the BIG problem as this can trigger a long term contraction in consumption. How can we help these people reskill and retrain so that they can re-enter the job market? What can we do to support people as the pressure to automate increases as business income contracts?

Universal Basic Income

One possible answer to many of these questions is Universal Basic Income. If we provide people guaranteed support with basics (e.g. food, rent) then we are not only cutting them some slack but also decoupling ‘survival’ with ‘growth’.

Universal Basic Income (UBI) is a simple concept to understand: all citizens get a basic income every month irrespective of how much they earn. This is guaranteed from the day they turn 18 till the day they die. They may also get a smaller percentage from the day they are born to help their parents with their upkeep.

See this TED Talk by Rutger Bregman for more on this:

With UBI a recession will not impact the basics of any household. It will provide a safety net for families and individuals. It will also allow people to develop their skills and innovate.

There are a few wrinkles in this. Firstly, how should we prevent inflation as ‘free money’ is handed out to people? One proposed mechanism is to use a different class of money from the currency of the country. This UBI money cannot be used as a store of value (i.e. can’t be lent for interest), just for limited exchange (e.g. food, rent). This is similar to the US Supplemental Nutrition Assistance Program (SNAP) – also known as ‘food stamps’ ( can be exchanged for certain types of food. Many other countries have tried this experiment (such as Finland, USA, Canada etc.). This form of money should also ‘expire’ periodically so that people don’t start using them in a ‘money-like’ way.

Another challenge is how do you convert the ‘temporary’ UBI money into ‘permanent’ currency. This is required for the businesses accepting UBI money to be able to pass it down the supply chain (both locally and internationally). For example if you buy all your groceries with UBI money and it is not convertible to currency then how will the grocery shop pay it’s staff and suppliers. What if the suppliers were importing groceries from other countries – how would they convert UBI money to any international currency. In SNAP, the stamps are equivalent to money. It doesn’t have the same impact as UBI as its cost is a fraction of the total US GDP (0.5%).

Still, one should never let a good crisis go to waste! Time to think differently.

What Happens Next?

In this post let us think about what happens next as we start to come out of the Covid-19 related lockdown.

No country can claim to be immune from the economic effects of the Covid-related lockdown. However, as countries start to emerge from the lockdown some will rebound faster than others.

What is happening now?

Let us next look at where we are today. Today, large number of people and businesses have seen the flow of money reduce to zero. The expectation of a return on investment is low for a large section of the economy. That said, certain sectors are doing quite well or as normal (e.g. groceries, online retail) as they are getting overflow business.

In this situation with little or no money going to people / businesses someone has to step in and be that ‘credible borrower’ and borrow on behalf of those who are struggling. This is the Government as the ‘credible borrower’ which then passes the borrowed money on to its citizens in a low-waste manner one hopes. One point here is that it is easy for a Government to print money rather than borrow, but that can lead to inflation without actual growth – so called ‘jobless growth’.

We can take the current situation as artificial suppression of demand and supply (as people loose incomes and stores are forced to close/reduce visitors).

This can also be understood as a scenario where blood supply to an organ in the body has been blocked. The body reacts in the very short term by reducing the function of that organ and rushing out chemical support to suppress pain but in the long term the body is severely impacted unless the block can be removed and/or another path can be found to deliver the required quantity of blood.

What happens Next and How to Deal with it?

It all comes down to effective planning and effective use of people, processes and tools.

Businesses that have or are able to quickly get the required plans in place for short and long term changes to how they work will benefit from overflow business.

People who are able to re-skill or move from impacted areas to areas of new opportunity will be able to benefit from continued employment during the rebuilding period.

Both the above things should allow some blood to flow to the organ but it does not restore normal supply nor fixed the original damage that resulted in a block.

Repairing the Damage

The repair will start once the lockdown ends. Those countries that release the lockdown earliest (and are able to ride the second wave of infections) will have ‘first movers’ advantage towards normalisation. This should also promote local business that step in to fill the gap from imports where possible.

The key point to keep in mind here is that we will not go back to status quo. Just as scar tissue is never as smooth as the torn skin it replaces. We will loose some businesses. Some people will fall into debt and be unable to recover without help.

Due to loss of incomes, social distancing and widespread work-from-home we will find demand continues to be suppressed for some time to come. This will be especially true for ‘non-essential’ goods. This means the suppressed demand must be unlocked using some of the options we will discuss below.

Who sinks/swims is down to how they prepared during the crisis for the post-crisis period (i.e. if they did not look to change business-as-usual and let a good crisis go to waste then they will sink) and how effectively they can implement those strategic plans in the coming months. This is a good example of Darwin’s Survival of the Fittest.

Who will survive:

  1. Those who are quick to plan and implement new processes that allows them to generate revenue.
  2. Those who have deep pockets to fall back on, for the next 12 months (at least)
  3. Those who are able to focus on their strengths and optimise resources – when we look at (2) we must remember “Markets can remain irrational for longer than you can remain solvent” (by John Maynard Keynes)
  4. Those who are directly benefiting from the crisis (short term survival)
  5. Those who enjoy a good name in the market or are ‘expected’ by the market to bounce back quickly

But what is the Recipe for Success? What should we do more of as a business?

  1. Advertise: Replace front-office with a slick website, smartphone app and/or virtual agent (even a chat-bot helps handle the first level of queries)
  2. Process transformation: Reduce the need for manual processes in business operations – this is not something only multi-million pound business need to do! In fact this is something everyone needs to do!
  3. Digitise and Automate as much as possible – from fundamental building block apps (e.g. billing) to more advanced planning, optimisation and prediction apps (Here is a golden chance for AI at the lower price-point. Or even local AI consultancy)
  4. Concentrate on strengths and focus your resources on the service/product that provides the greatest rewards – enable home delivery where possible – smart phones + hybrid/electric vehicles should reduce cost of operations and bring home delivery to the same price point as in-store
  5. Don’t stop innovating.. innovation is the hidden strength of any business (large or small!)

As an individual, facing an uncertain future in terms of employment, lot of the above points are just as relevant (once the context is changed):

  1. Advertise your existing skills and experience (make a website, LinkedIn profile), talk about your interests and hobbies! Blog!
  2. Look inward: Look at all the good stuff you have done, all the mistakes you have made and the lessons you have learnt. Try changing something small about yourself that you feel will improve the way you feel about yourself. For me this was ensuring I take in a lot of outdoor play time with my kids!
  3. Prepare your tools: make a CV, take stock of where you have been and where you want to get too! You won’t get another chance like this to plan your career!
  4. Concentrate on your strengths: reduce expenditure, improve efficiency by doing the important things and ignoring things that lead to waste of time, money or both. One personal example: we started cooking more at home which resulted in not only money saving but also us discovering new things that we could make at home!
  5. Don’t stop learning! Now is the time to take a risk. Make sure you use all the tools available to engage with people who are leaders in your field of learning as well as fellow students – this can be anything – from cooking to a language
  6. Don’t stop thinking and creating. Write a short story, create a new dish, draw a picture, change the layout of your living room! These act as massive confidence boosters

Additional Thoughts: Automation

Automation was on the rise before Covid. The bigger players have already moved online and use automation enabled IT therefore continue to sell effectively (albeit within constraints). But the contact-less nature of the solution to this problem will push app/online interaction even more. As this happens, it makes it easier to automate the interaction. Two small examples:

  1. Pizza shops now only support cashless delivery, no collection. Therefore, all my interaction with the pizza shop is through their website or an app (e.g. JustEat). The pizza is placed on my doorstep and I hardly even see the delivery person as they back away more than 2 meters and leave as soon as they see me pick-up the pizza.
  2. Food stalls in various food markets have started home deliveries (again cashless and contact-less). Earlier they would hire staff to manage long queues, today they operate behind a slick website (that you can throw up in a few hours), a scheduling tool, and WhatsApp messaging to personalise the interaction.

This effect when combined with the long term trend of more people working from home (which is bound to accelerate now) is an opportunity for small business to deliver local services through different app-based platforms involving lots of automation (to make it cheaper). The smaller players have to make use of the same force-multiplier tools, platforms and channels as the bigger players right now! The most basic one is the ability to accept online orders and payments.

Now that people don’t travel for work then they no longer form a captive market for food vendors, coffee shops and bars. But these things can come to their doorstep! With automation enabled IT the cost of home delivery can be managed especially with the added benefits of scale.

Finally: I am still waiting for the day I can order Starbucks coffee to my home for the same price (if not cheaper) as what I get in the stores. Starbucks could open coffee-making kitchens in different areas and serve the area from there. Automation will help by providing seamless links between different stages, AI-based planning and prediction of demand.