Forget the usual Debt-to-GDP ratio that is thrown about when discussing a countries ability to pay. A more realistic ratio is between its debt and its income since debt is paid from a governments income. When you consider this comparison, then 3 countries in the eurozone have  a ratio greater than 300%. Worse still is the US with a debt-to-income of 304% in 2012.

Ireland, Greece and Portugal are labouring under debt-to-income ratios of more than 300%, according to figures that expose the indebtedness of eurozone governments in relation to their government revenues.

The measure, intended to show governments’ abilities to pay debts, shows Ireland’s total debt in 2012 was €192bn (£163.1bn), or 340% of the government’s income. Ireland came a narrow second in the table to fellow bail-out recipient Greece, which has amassed an even worse debt-to-revenue total of 351%. Portugal – which has also received aid from the troika of the International Monetary Fund, the European commission and the European Central Bank – came third with a debt-to-revenue ratio of 302%, while Britain was sixth last year on the list of 27 European Union member states, with a debt-to-revenue ratio of 212%, according to calculations based on European commission figures.

 Debt figures are usually calculated as a ratio of a country’s national income and expressed as a proportion of GDP. But national income figures reflect activity across the whole economy, in both the public and private sectors. governments must pay debts from tax receipts and other government income, not the income for the economy as a whole. Some analysts argue a government’s debt-to-revenue ratio provides a clearer picture of its ability to fund annual debt payments once interest rates are taken into account.

The US is in even worse shape than Greece. Its $16tn (£10tn) debt is the equivalent of 105% of GDP, but more than 560% of government revenues. Washington’s debt payments are cheap after a plunge in the interest it pays on government bonds, but with revenues of only 14% of GDP compared with about 40% across much of the EU, its ability to pay is weakened.

Ireland, which is often commended for its recovery from the banking crash, has seen a sharp rise in its debt-to-revenue ratio in the last four years. In 2009 the ratio was 187%. A year later it had jumped to 262% before reaching 340% in 2012. However, the country appears to be in better shape when debt-to-GDP figures are used. It ranks fourth, with a 117.6% ratio, after Greece, Italy and Portugal.

Greece’s performance, by contrast, has improved. It has pushed through a huge clampdown on government spending and has seen its ratio fall from 402% in 2011 to 351% in 2012.

Some of Europe‘s strongest economies have jumped up the league table of indebted EU nations when the debt-to-revenue measure is used. Germany has a ratio of 181%, Malta’s is 178%, while France has a ratio of 174%, all higher than countries that are often cited as troubled and at risk of default such as Slovenia (120%) and Hungary (168%).

The healthiest economies according to the debt-to-revenue measure are the Nordic nations, where Sweden enjoys a 75% ratio, Denmark a 82% ratio and Finland a 99% ratio in 2012.

In the aftermath of the 2009 banking crash, the US investment bank Morgan Stanley argued that debt-to-government-revenue ratios should be included in any discussion of a possible sovereign debt default.

Analyst Arnaud Marès, who has since left the firm, said in August 2010: “Whatever the size of a government’s liabilities, what matters ultimately is how they compare to the resources available to service them. One benefit of sovereignty is that governments can unilaterally increase their income by raising taxes, but they will only ever be able to acquire in this way a fraction of GDP.

“Debt/GDP therefore provides a flattering image of government finances. A better approach is to scale debt against actual government revenues. An even better approach would be to scale debt against the maximum level of revenues that governments can realistically obtain from using their tax-raising power to the full.

This is a function of the people’s tolerance for taxation and government interference. Seen from this angle, the US federal debt no longer compares quite so favourably with that of European governments.”

In 2010, US debt to revenue was 365%.

Source: The Guardian