Debt Interest Payments as a % of GDP and Tax

The amount of debt interest a government needs to pay depends on two factors:

  • The amount of outstanding debt.
  • The interest rate on government bonds.

Higher bond yields will increase the cost of future borrowing.

Note: There are quite a few different ways of measuring government debt / financial liabilities, therefore you may come across slightly different statistics for debt interest payments as a % of GDP. I have indicated source of data where possible.

net interest payments % gdp
Source: OECD economic outlook, 91 April 2012

Debt interest payments as a % of GDP / Tax revenue give a reasonable guide to how manageable the government’s debt situation is. For example, Japan has a national debt of over 220% of GDP, yet net debt interest payments are forecast to be only 1.4% of GDP in 2013. Italy by contrast is facing a higher interest burden, with over 5% of GDP going on net debt interest payments.


It is worth noting that in the case of UK and US, net interest payments are not exceptionally high as a % of GDP.

UK Net Interest Payments as a % of GDP

net financial liabilties

Government net financial liabilities. Japan’s have increased significantly, though the interest rate burden has stayed low because of very low interest rates.


General Government net financial liabilities % of GDP.

 Interest Payments as a % of Tax Revenues.

interest payments-country7

source: World Bank Interest payments % tax

Interest payments as a % of tax revenue also give an idea to the affordability of debt.

An interesting fact is to see how debt interest payments as a % of tax revenues fell considerably for Greece and Italy in the period 1997 to 2007. This was due to the benefit of joining the Euro and getting lower interest rates as a result of being in the Euro. (It’s hardly surprising countries were so keen to join, when you see how much interest payments fell). However, from 2008, it has been quite a different story as the benefit of low interest rates evaporated. It was a shame the data stopped in 2010, it would be interesting to see how debt interest payments as a % of tax have increased in the peripheral Eurozone economies. See: EU Bond yields

Real Debt Interest Payments

When examining the effective cost of borrowing, it is important to take into account inflation. If inflation is 10% and gilt yields 10%, then the effective cost of borrowing (real interest rate) is zero. If inflation was 12% and gilt yields 10%, the real cost would be 12-10.

Currently, UK bond yields are close to 2%, slightly lower than CPI inflation of 2.6%

Effective Cost of Borrowing

Source: Centre Forum

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