When people talk about a country’s debt, they often apply an intuition drawn from household finances: the less you owe, the better; the more you owe, the greater the danger.
But modern economies do not work that way.
Compare major economies such as the United States, Japan, China, Australia, the United Kingdom, France, Germany, South Korea and India, and an interesting pattern emerges. Many of the world’s wealthiest countries, with its most mature financial systems, also have substantial government debt relative to GDP. Japan’s government debt has long exceeded twice its GDP, and US government debt has also surpassed GDP, while the ratios in Germany, South Korea and Australia are considerably lower.
At the very least, this tells us that debt itself is not synonymous with poverty or economic failure.
More precisely, debt is one mechanism through which a modern economy turns future income into investment today.
Suppose a company plans to build a factory costing 10 billion yuan. Without any credit system, it would have to earn money and accumulate capital until it had the full 10 billion yuan before construction could begin. That could take ten years or more.
Modern finance changes this relationship with time.
There are always people who temporarily have funds they do not need to invest immediately, alongside businesses with investment opportunities but insufficient funds of their own. Banks, bond markets and other financial institutions connect the two. A business can obtain funding and build its factory today, then gradually repay the debt from the income generated by future production.
One of debt’s most important economic functions, therefore, is to shorten the time required for capital formation.
In this sense, an economy with very little debt is not necessarily functioning particularly well. If low borrowing reflects an underdeveloped financial system, insufficient credit or an inability to channel savings effectively into investment, substantial potential capital is effectively sitting idle. Investments that could be made today have to wait for years.
An important qualification is needed here. Debt is only one form of financing. Businesses can also raise equity, governments can fund activities through taxation, and households and businesses can draw on existing savings. What matters is not whether an economy has “enough debt”, but whether it can effectively turn existing savings and future income into investment that creates productive capacity.
This brings us to the other side of the problem.
If debt can shorten the investment cycle, does that mean more debt is always better?
Clearly, it does not.
Debt is not free. It commits a portion of future income in advance to the repayment of principal and interest.
Suppose an investment can earn an 8 per cent return on capital while its financing costs only 3 per cent. Borrowing to bring that investment forward will usually make economic sense. The company need not wait ten years to accumulate the capital, because the project’s return exceeds the cost of funding it.
But suppose conditions gradually change: the investment can earn only 4 per cent while financing costs have risen to 5 per cent. The economic role of debt changes. Additional borrowing no longer improves the efficiency of capital allocation; instead, it begins to consume future income.
To assess whether debt is healthy, a relationship closer to the underlying economics than a debt-to-GDP ratio alone is:
The marginal return on assets financed by borrowing, relative to the marginal funding cost of additional debt.
As long as the former remains above the latter over time, debt may be productive. It brings productive capacity into existence earlier, while the additional output, income and tax revenue can support the borrowing.
If that relationship reverses for a sustained period, an increasing share of new borrowing may cease to create productive capacity. Instead, it may repay old debt, cover interest, sustain existing asset prices or fill persistent fiscal gaps.
Debt then gradually shifts from a tool for accelerating capital formation to a fixed claim on future income.
This is also why a ranking of debt ratios cannot, by itself, tell us which country faces greater danger.
According to the IMF’s latest complete Global Debt Database, global public and private debt in 2024 still exceeded 235 per cent of world GDP, amounting to approximately US$251 trillion. Public debt was close to 93 per cent of GDP, while private debt was just below 143 per cent.
That figure looks alarming, but an often overlooked point is that the world does not owe US$251 trillion to someone outside the planet.
One party’s debt is simultaneously another party’s financial asset.
If an Australian household borrows A$1 million from a bank to buy a home, that million dollars is a liability for the household and an asset for the bank. If the US government issues US$1 trillion in Treasury securities, it adds US$1 trillion to its liabilities, while pension funds, banks, insurance companies, households or foreign investors acquire corresponding financial assets.
For the economic system as a whole, the crucial question is therefore not simply “Who is all this money owed to?” It is whether these relationships between creditors and debtors can continue to rest on real income, asset values and the capacity to repay.
Trouble begins when the underlying assets lose some of their ability to generate income while the contractual obligations to repay principal and interest remain.
The global financial crisis of 2008 illustrated this mechanism to a considerable extent. The financial system appeared to hold vast quantities of assets, but those assets ultimately depended on households’ ability to repay their mortgages and on property prices. When underlying cash flows and asset prices could no longer support the enormous structure of financial claims built upon them, deterioration in one balance sheet quickly spread to another.
Debt is therefore, first of all, a question of how balance sheets are interconnected.
Looking at individual countries makes these differences clearer.
In Japan, government debt is the most prominent issue. Its public-debt ratio is extremely high, but much of the debt is denominated in its own currency and held by the domestic financial system and the Bank of Japan. Japan’s main risk is therefore not the classic emerging-economy problem of lacking foreign currency to repay its debts. It concerns the long-term balance between population ageing, public spending, economic growth and the government’s interest burden as rates rise.
The United States presents a different case. Its government debt is high, but the dollar is one of the world’s most important reserve and transaction currencies, while US Treasuries serve as a major safe asset in the global financial system. This gives the United States a financing capacity that most countries cannot match. It does not, however, mean the country can borrow without limit. As debt and interest rates rise, a larger share of government revenue may have to go towards interest payments, ultimately squeezing the room for other public spending.
Australia has a different structure again. Its government debt is not particularly high among major advanced economies, but household indebtedness is substantial, with housing mortgages playing a central role. Comparing government debt alone would therefore seriously understate leverage in the Australian economy.
China may be the most structurally complex of these cases.
BIS data show that credit to China’s non-financial corporate sector has long been very high, with the latest series now extending to the first quarter of 2026. Yet Chinese “corporate debt” cannot simply be understood as the equivalent of private business debt in Western economies, because it includes many state-owned enterprises and institutions performing quasi-public functions.
Local government financing vehicles make the picture more complicated. In its latest research in 2026, the IMF explicitly distinguishes China’s official local government debt from LGFV debt, treating the latter as a stock of debt that requires separate attention. In its report on China’s 2025 Article IV consultation, the IMF also uses an estimate of “augmented government debt”, which includes some quasi-fiscal borrowing by local government financing vehicles, government-guided funds and similar entities. How much debt China’s government has therefore depends substantially on where the statistical boundary is drawn.
This illustrates precisely why simple comparisons of national debt ratios can mislead.
Japan concentrates a great deal of leverage on the government’s balance sheet. In the United States, federal government debt is particularly prominent. In Australia, much of the leverage sits within households and the housing system. In China, a substantial amount is distributed across businesses, local governments and quasi-fiscal arrangements.
These are all forms of debt, but their economic implications differ fundamentally.
To examine a country’s debt position, we should therefore look at least at government, households and non-financial corporations together. We must also ask whether the debt is denominated in domestic or foreign currency, whether it is held by domestic or overseas investors, its average maturity, the cost of financing it, and how much future income the assets financed by that borrowing can actually generate.
Only then can we return to our original question.
The best position for an economic system is neither to eliminate debt nor to expand it as much as possible. It is to maintain a dynamic balance between the speed of capital formation and the future cost of repayment.
Too little debt, when it results from a financial system’s inability to mobilise society’s savings effectively, lengthens the process of capital formation and reduces the efficiency of resource allocation.
When debt is moderate and directed towards investments with strong returns, finance effectively compresses time, bringing productive capacity that might otherwise emerge in the future into existence today.
Once debt becomes excessive, more and more future income is committed in advance to principal and interest. Newly generated income must then maintain debt structures inherited from the past, and the efficiency of capital allocation begins to fall.
If we want a measure with more explanatory power than debt as a share of GDP, I think there is a useful concept we can put forward: debt productivity.
By this I mean:
How much additional future income and productive capacity an economy can create for each additional unit of debt.
Of course, this is not something that can be measured accurately simply by dividing additional GDP by additional debt. GDP growth is influenced by technological progress, population, fiscal policy, the economic cycle and many other factors. But as an analytical framework, it gets closer to the real issue than a comparison of debt ratios alone.
If an additional yuan of debt once supported substantial new productive capacity, but progressively more borrowing is now needed to sustain the same economic growth, an important change has already occurred, even if no debt crisis has yet emerged. The marginal efficiency with which the financial system converts future income into present productive capacity is declining.
Viewed from this perspective, the question about debt across the world is no longer “Who owes the most?”
What we should really ask is who uses debt most effectively, who is using today’s borrowing to create tomorrow’s productive capacity, and who is using tomorrow’s income to sustain debt accumulated yesterday.
That may be the central question in judging whether debt in a modern economic system is healthy.
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