Do widening deficits always imply a larger debt to GDP?

Delia Paredes & Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

In Mexico, the economic package sent by the Executive to Congress on September 8 projects an increase in the fiscal deficit to 5.4% of GDP next year, up from 3.9% in 2023. At the same time, it projections show Mexico’s debt-to-GDP ratio remaining at levels of 48.8% over the next five years.

How could this happen? Doesn’t expanding the fiscal deficit necessarily lead to an expansion of debt?

In absolute terms, yes: a larger deficit from one year to the next results in a larger debt. But these budget projections are expressed as percentages of GDP. So, we must consider not only the numerator (debt) but also the denominator (GDP).

It turns out that the government is projecting economic activity to prove so robust over the next five years that rising GDP offsets debt expansion entirely. Thus, the ratio between the two remains constant.

Note: we are not expressing here our agreement with these rosy official projections. Rather, we’re explaining how their arithmetic works.