Debt Burden Ratios

Definition of Debt Burden: Debt burden is the cost of servicing debt. For consumers it is the cost of interest payments on debt. The debt burden will be higher for credit cards and loans with high interest. The debt burden on mortgages will be relatively lower compared to value of loan.

For countries the debt burden is the cost of servicing the public debt. Most of this debt burden is a really transfer from one generation to another. However, National debt can be a real debt burden because:

  • If the debt is held externally. E.g. 25% of US debt is held abroad making US liable for external interest transfers.
  • When debt is held externally, it may also cause a depreciation in the exchange rate and hence a worsening of the terms of trade. (imports more expensive)
  • High public debt may also cause higher taxes which distort work incentives e.t.c

Debt Burden Ratios

This is the ratio of debt burden to income. For example, if you pay £2,000 in debt interest and have an income of £40,000. Your debt burden ratio is 5%

If you a country has a debt burden of £100bn and pays debt interest of £60bn. Its debt burden is 60%.

Sometimes the debt burden is measured as GDP / Total debt

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