Net Debt Per Capita

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Blog Author :

Priya Choubey

Edited by :

Shreya Bansal

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What Is Net Debt Per Capita?

Net debt per capita is a financial measurement that quantifies the amount of net debt accrued by a government or other jurisdiction derivable on each resident or citizen basis. It ascertains the leverage position of a government. Thus, a lower amount is considered to be favorable.

Net Debt Per Capita

Although not an accurate economic indicator, it is crucial to determine whether a government efficiently meets its debt service cost from its current revenue base. Hence, it facilitates the analysis of the overall economic condition of a country or jurisdiction by gauging the risk involved in government bonds.

Table of contents
  • Net debt per capita is a financial metric that provides insight into the amount of government debt adjusted for financial assets attributable to each citizen or resident of the country or respective jurisdiction.
  • It’s formula is: Net Debt Per Capita = (Short-term Debt + Long-term Debt – Cash – Cash Equivalents) / Population
  • The net debt per capita is not a true economic indicator. Still, it signifies the leverage position of a government and the overall fiscal health by analyzing the default risk associated with the respective government bonds.

Net Debt Per Capita Explained

Net debt per capita is a significant metric in evaluating each citizen's financial burden in terms of net government debt. It aids in assessing the affordability of the debt and its potential impact on future generations. Furthermore, it enables comparisons of debt levels between different countries or regions.

A higher net debt per capita generally indicates a more significant debt burden on each individual within the population, implying potential challenges in meeting debt obligations. However, it is essential to note that this metric does not capture qualitative aspects of debt, such as terms, interest rates, or maturity profiles, which can significantly affect the affordability and sustainability of the debt.

The primary factors contributing to net debt per capita are the total outstanding debt of the entity and the size of its population. Suppose a country or region possesses a high level of debt with a relatively small population. In that case, the net debt per capita will be higher than in a country with a larger population.

While net debt per capita is a valuable indicator, it should be utilized with other economic and financial metrics to understand a country's overall fiscal and economic health comprehensively. Factors such as GDP growth, debt-to-GDP ratio, interest rates, and demographic trends should also be considered for a well-rounded assessment and effective planning.

Formula

Net debt per capita is calculated by dividing the government's total debt (including both short-term and long-term debts) minus its financial assets, such as cash and cash equivalents, by the country's total population.

The formula is:

Net Debt Per Capita = (Short-term Debt + Long-term Debt – Cash – Cash Equivalents) / Population

By employing this formula, individuals can assess the average financial burden experienced by each person within a country or region.

Examples

Let us consider the following examples to understand the concept better:

Example #1

Suppose a nation's central government has an outstanding $37.5 billion short-term debt and $82.5 billion long-term debt. Its financial assets are cash worth $18 billion and cash equivalents of $22 billion. If the country's population is 200 million, then determine the metric.

Using the formula:

Net Debt Per Capita = (Short-term Debt + Long-term Debt – Cash – Cash Equivalents) / Population

Substituting the given values into the formula:

Net Debt Per Capita = ($37.5 billion + $82.5 billion - $18 billion - $22 billion) / 200 million.

Therefore, this nation's net debt per capita would be $400. It means that, on average, each citizen would owe $400 million of the net debt payable by the government.

Example #2

According to data from the Bureau of Economic Analysis, the United States faces a significant debt issue, surpassing $31 trillion in 2022. Despite being the global superpower and the wealthiest nation in terms of overall wealth, the country's priorities are more focused on subsidizing the wealth of the rich rather than investing in cutting-edge technology to maintain its dominance. While the U.S. remains the most technologically advanced country, China is rapidly closing the gap by making substantial investments to become the global tech hub.

Significance

The net debt per capita is a crucial measure economists, policymakers, and governments use to keep track of its leverage position and plan repayments accordingly. It is vital for the following reasons:

  1. Fiscal Health: It facilitates the economist to gauge a country's economic health by measuring its net government debt burden per citizen.
  2. Financial Burden: It indicates the average debt load each person in a country would bear if the debt were distributed equally, reflecting their capacity to support the debt through taxation and non-tax payments such as penalties, grants, or donations.
  3. Inter-country Comparison: Comparing net debt per capita across countries allows for the relative assessment of debt levels, aiding in evaluating fiscal policies and economic stability.
  4. Economic Impact: Higher levels of debt per citizen may imply a more significant proportion of government revenue being allocated to debt servicing, potentially limiting the funds available for national development through investment in infrastructure, education, healthcare, or other productive areas.
  5. Sustainability and Default Risk: A high net debt per capita indicates a significant risk of default or a strained fiscal position for a country. Since it signifies that the government may face challenges in managing its debt obligations, resulting in increased borrowing costs, reduced investor confidence, and the need for corrective measures.
  6. Policy Evaluation: It serves as a valuable measure for policymakers to evaluate the effectiveness of the nation's fiscal policies. Hence, it provides a basis for assessing the impact of government spending, taxation, and borrowing decisions on the financial well-being of the population.
  7. Long-term Planning: Tracking net debt per capita over time identifies trends and patterns in a country's debt accumulation. It enables proactive measures to manage and reduce debt burdens for fiscal sustainability.

Frequently Asked Questions (FAQs)

1. Which is debt free country?

A debt-free country has no outstanding financial liabilities or obligations in public debt, indicating that the government owes no money to external creditors or institutions. While there may not be any completely debt-free countries, some nations have relatively low debt levels compared to their GDP or population. An example often cited is Hong Kong.

2. Where can I find reliable data on net debt per capita?

Several reputable sources can be utilized when searching for net debt per capita data. These include government reports, publications from central banks, and renowned international financial institutions like the International Monetary Fund (IMF) or the World Bank. Economic databases and statistical agencies in various countries may also provide relevant data.

3. Does it matter how much debt a country has?

A country's debt can significantly affect its economy and financial stability. High debt levels can lead to challenges such as increased interest payments, limited fiscal flexibility, and potential credit rating downgrades. It can also impact investor confidence, borrowing costs, and a nation's economic growth prospects. Therefore, managing and monitoring a country's debt levels is crucial for sustainable economic development.