3.3.8 (HL)—Sustainable government debt

Debt is sustainable when the government can service it without explosive refinancing or unacceptable future adjustment.

Interest rates, growth, primary balance, currency and investor confidence affect debt dynamics.

Compare debt service with revenue and growth, not only the debt ratio.

Debt may stabilise if nominal growth exceeds the interest rate and the primary deficit is contained.

A high ratio is a warning, not a complete sustainability verdict.

Measure the stock as $\text{government debt-to-GDP}=\text{government debt}/\text{GDP}\times100$. A budget deficit is a flow in one year and normally adds to the debt stock; a surplus can reduce it. For example, debt of $900 billion with GDP of$1.2 trillion gives 75%. Sustainability depends on interest and refinancing costs, growth, revenue, currency and maturity: high debt can raise debt-service opportunity costs, weaken credit ratings and force future tax rises or spending cuts, but the ratio alone is not a universal threshold.