Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16 (equivalent to 86% of GDP for public sector net debt, (PSND) and will only gradually decline from 2017-18. This compares with Fitch’s previous projection for GGGD peaking at 97% and declining from 2016-17 and the ‘AAA’ median of around 50%.It looks like: 97% good, 101% bad.
It comes at the end of a week when we have been celebrating the demise of the myth of the 90% threshold for debt to GDP beyond which lay catastrophe.
A 100% the threshold doesn't make any better sense than 90%. In fact as Frances Coppola pointed out yesterday, the debt ratio is a poor way to predict the health of an economy. It is even a poor way of looking at the health of public finances. She explains it like this:
Debt/GDP is a pretty confusing metric, since it compares a stock and a flow. It would be more meaningful to compare fiscal deficit/GDP. But even that is not ideal, since GDP measures activity in the economy, not government income, and the government income figure is netted with spending to give the deficit. The reality is that governments do not have to pay all their debt off in one year - in fact most governments pay off little or no debt. What they have to do is service the debt. And their ability to service the debt is governed by two things: 1) the interest rates prevailing on outstanding debt stock and on new issues during that period: 2) revenue from taxation and other income.What does it mean to say that national debt is 100% of a country's annual income? It means that debt is 50% of two years income, 25% of four years income or 10% of ten years income. That is what happens when you mix a stock and a flow. I've talked before about how government's can run deficits forever, provided the economy is growing.
The reasoning behind Fitch's downgrade is flawed and we should take no notice. Unless, like Ed Balls you want to add to Mr Osborne's discomfort.
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