The maths behind the madness
ALL EYES are on Spain ahead of the European Council's two-day meeting in Brussels beginning on October 18th. In just three short years, the country's horrendous housing bust and subsequent recession have caused government debt to increase from a sustainable 40% of GDP in 2008 to 70% of GDP in 2011. Despite brutal government spending cuts, by the end of this year the IMF forecasts government debt will reach 90% of GDP. The question of whether Spain will seek a bail-out preoccupies markets and policymakers alike.
Our interactive graphic below shows the IMF's latest forecasts (updated in October 2012) for government gross debt as a percentage of GDP through to 2017. It also allows you to input your own long-term assumptions to project the likely path of debt to 2020.
There are two things that matter in government-debt dynamics: the difference between real interest rates and GDP growth (r-g), and the primary budget balance as a % of GDP (ie, before interest payments). In any given period the debt stock grows by the existing debt stock (d) multiplied by r-g, less the primary budget balance (p)....MORE
