Fiscal Deficit to GDP Ratio

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The U.S. budget deficit focuses new attention on the debt as a percentage of the nation's aggregate economic output, as measured by the Gross Domestic Product, or GDP. In the years following the global financial crisis of 2008, efforts by Congress and the White House to bail out the nation's financial system and stimulate the sagging economy have widened the gap between government revenues and expenditures, raising the ratio of the deficit to GDP.

Function

The fiscal deficit to GDP ratio measures a country's fiscal deficit, or the amount by which budgeted expenditures exceed expected revenues, in relation to the country's GDP. Because nations that run a fiscal deficit must make up the difference by borrowing, the ratio compares what a nation borrows to what it produces. The deficit to GDP ratio provides an indication of the country's ability to pay back its debts.

Size

In January 2011, the "Washington Post" reported that the U.S. budget deficit would reach about $1.5 trillion in 2011, making the nation's fiscal deficit 9.8 percent of the nation's GDP. This is the largest deficit to GDP ratio since World War II, the newspaper reported.

Caution

It is important not to confuse the fiscal deficit with the overall national debt. The deficit is the amount by which expenditures exceed revenues, while the national debt is the total of all accumulated deficits over the years. For example, the U.S. has a fiscal deficit for most of the last 40 years. The last time the U.S. ran a budget surplus, in which it collected more in revenues than it spent, was in 1998. The last surplus before that was in 1969, according to Harvard economist Greg Mankiw and author of "Principles of Economics."

Effects

As a country's deficit to GDP ratio increases, its national debt rises as well, increasing the size of the debt to GDP ratio. This ratio, another measure of a country's ability to pay, measures the overall national debt, or the sum of accumulated deficits, as a percentage of aggregate economic output. In 2010, the estimated U.S. national debt was 58.9 percent of GDP, according to the CIA World Factbook. This figure ranked the U.S. 37th among nations in terms of debt to GDP ratio. Japan had the highest ratio, with debt estimated at more than 200 percent of GDP. Higher ratios of deficits and debt to GDP place nations at risk of higher inflation, high interest rates and lower economic growth, making it even more difficult for governments to repay their debts.

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