Foto: Tomass Urbelionis, F64/BFL
During the IMF-EU programme some have expressed concern about Latvia's ability to repay the loan.
That is actually not a serious problem - it is one of the places where a country has a huge advantage over a mere mortal soul.
Government debt is often measured as a share of GDP (see Figure 1). This makes sense since GDP can be seen as a country's tax base i.e. the amount of money from which it can tax. Latvia's tax take was 35% of GDP in 2010, a relatively low share by EU standards.
The dynamics of the debt ratio are not that complicated but they are affected by five factors.
A higher budget deficit by itself adds to the debt ratio. Higher interest rates on government debt add to the ratio. Economic growth reduces the ratio (since it widens the tax base). Higher inflation does the same since it widens the tax base in terms of lats. Lastly, the higher the existing debt ratio, the higher is the effect from interest rates, inflation and growth.
