Current affairs

Friday, 23 de June, 2017

By Gaietà García, a lecturer on the Master in Commercial and Sales Management at EAE Business School

In this article, I will present certain relations between the concepts in the title, some of which are, at the very least, strange or surprising.

GDP and GDP per capita

The term Gross Domestic Product (GDP), refers to the value at market prices of the output of goods and services internally in a country within a certain year or period of time.

Figure 1 shows a GDP for Spain, in 2016 of €1,113,851 M, (1.114 trillion euros). This is used to measure a country’s nominal creation of wealth for each financial year. A sustained increase in GDP is associated with the creation of employment, without taking other factors into consideration.


It can be observed that, in the decade between 1997 to 2007, GDP doubled, before the growth rate slowed down in the years that followed.

It is an absolute magnitude and, as such, we must be careful when interpreting it, as it necessary to take extremely significant qualitative considerations into account, such as the uneven contribution to GDP of the different Autonomous Communities, and the distribution of GDP across sectors of the economy, among others.

Figure 1. Annual GDP in Spain. Source:


As each country or region has a different number of inhabitants, in order to standardize the population effect, the nominal GDP is divided by the average population over the period in question, to determine the GDP per capita. In other words, this is the wealth creation generated by each inhabitant on average, as shown in Figure 2. Obviously, the term ‘on average’ is matter of mathematic certainty which, at the same time, does not reveal extremely important qualitative nuances. For instance, it is highly likely that the contribution of wealth of the nation or region as a whole is uneven: a lot of people generate a little and a few people generate a lot. With certain macroeconomic adjustments, the GDP per capita can be used to calculate the National Income per capita, which is subject to the same nuances.



National Debt and National Debt per capita

Just like individuals, households and companies, the State also gets into debt. It turns to what are known as financial markets, in which certain lenders give loans that have to be paid back in line with the stipulated timescale and cost. The nominal amount owed by a State at any given time is known as the National Debt.

A State’s National Debt at a certain time is divided by the number of inhabitants in the same period to calculate the National Debt per capita, or, in other words, the amount that each person on average owes to the financial markets.

The evolution of Spain’s National Debt in recent years, in absolute values and per capita, is shown in Figure 3. In order to get a relative perspective of the wealth generated each year, GDP, with respect to the public borrowing for the same period, the amount of the National Debt is also shown as a percentage of GDP. This measures the capacity to repay the loans taken out by the State.

National Debt and GDP. It is clear to see that the nominal debt was restrained between 1997 and 2007. As GDP grew by double over this period, public borrowing as a percentage of GDP fell to 35.6%. In other words, with just over a third of the wealth produced in a year, all of the debt could be repaid, which indicates a good level of solvency or capacity for repayment. From 2007 onwards, public borrowing rocketed, with annual growth rates far above the rises in GDP. As a result, in 2016, the National Debt was equivalent to 99.4% of the year’s GDP. As such, the wealth generated in a whole year is needed to pay back all of the National Debt. Obviously, Spain has lost solvency and financial credibility by becoming overindebted. Moreover, the future trend seems to be increasing use of borrowing by the State.

National Debt per capita. The statistics show that, from 1997 (€8,311 per capita) to 2007, (€8,404 per capita), National Debt remained fairly steady at between €8,000 and €9,000. From that point onwards, the average amount need from each citizen’s pocket to settle the National Debt soars up to €23,822 per capita. In other words, in barely ten years, the National Debt per capita has tripled.

Comparing the National Debt per capita in Figure 3 with the GDP per capita in Figure 2, we can clearly see how the individual solvency of citizens has worsened with respect to borrowing over which they had absolute no decision, as it is decided by the current Government in the State’s General Budget.

In 1997, we had a GDP per capita of €13,000 and a National Debt per capita of €8,311. The ratio of debt to annual wealth generated can be calculated by dividing the latter by the former: National Debt/GDP; €8,311/€13,000 = 63.93%. In other words, in 2007, each citizen would have had to contribute 63.93% of the average wealth generated that year in order to pay off all of the debt.

In 2016, we had a GDP per capita of €24,000 and a National Debt per capita of €23,822. The ratio of debt to annual wealth generated: National Debt/GDP; €23,822/€24,000 = 99.25%. This means that, in 2016, each citizen would have had to contribute all of the average wealth generated that year in order to pay off all of the debt. Clearly, the solvency and financial credibility of Spain’s citizens as a whole has worsened.

Spanish household debt. While the Spanish State has increased the National Debt to levels of almost 100% of annual GDP, the financial conduct of households in recent years has moved in the opposite direction. There has been a gradual decrease in the nominal amount of household borrowing, with families managing to take advantage of the lower cost of mortgage instalments due to the interest rates in order to repay the outstanding debt more quickly. 

The evolution of borrowing by Spanish households is shown in Figure 4. It can be observed that household debt in November 2015 (€560,874 M) is below the level in December 2006 (€575,676 M) and approaching levels for 2005, (€477,214 M).


Reasonable borrowing should be taken to mean a level that meets at least two criteria. The first is that the repayments do not exceed a certain proportion of our capacity to generate the wealth that we will use to repay the debt, bearing in mind that we also have to allocate resources to the consumption of the everyday goods and services that we need, as well as saving a little for the future if possible. Secondly, the goods and services that we spend the borrowed funds on must provide a return or benefit higher than the associated cost or sacrifice. Otherwise, borrowing will be financially disastrous and lead to bankruptcy for individuals, households and even the State itself. When we refer to public borrowing, the return or benefit must be seen as an increase in the quality of life of the citizens, who bear the burden of their part of the National Debt. 

Level of wellbeing

How can we measure and evaluate whether the investments in goods and services made by the State using its own resources and public borrowing have a positive impact in terms of increasing the sensation of wellbeing across the State by the region’s inhabitants? The Organization for Economic Co-operation and Development has designed an indicator that it refers to as the Index of Sustainable Economic Wellbeing to determine the wellbeing of each country at different time, based on certain parameters. The data is shown below in Figure 5.


As we can see from this diagram, the level of economic wellbeing in Spain rose very significantly between 1980 and 2008, which was logical and to be expected as the country underwent extremely considerable development during this period. Interestingly, however, from 2008 to 2014, the level of economic wellbeing decreases slightly when, during this period, the country registered record levels of National Debt, which multiplied by 2.4 times, and households made efforts to reduce their level of indebtedness.


If the extreme public borrowing undertaken in this period was not perceived by the population or the OECD as an increase in social and economic wellbeing, then what has the State been spending our money on? Because there was far greater National Debt in 2014 but the wellbeing was in decline. The diagram also shows that there are countries that have recorded increasing growth in their Economic Wellbeing Index, or at least they have maintained levels of growth. So, if this is possible, what is happening to Spain?

The breakdown of the composition of the factors that make up the Economic Wellbeing Index, designed by the OECD are shown in Figure 6 below:

Intergenerational conflict

In view of all of the above and, first and foremost, the interrelation of the magnitudes in question, the following conclusions and inferences can be drawn:

  • Spain is in a situation of overindebtedness that seriously compromises its growth and future development, in view of the fact that the greater the National Debt as a proportion of GDP, the lower the solvency and the appreciation of the ability to repay the debt, which makes the cost of the borrowed resources more expensive. Meanwhile, the consequence is that, in the State’s General Budget, the allocation for repaying debt and interests is enormous, leaving little room for manoeuvre in terms of distributing the wealth generated to cover the everyday financial needs of the State: pensions, education, infrastructures, technology and public services, among others. As there is not enough money to cover all of the expenses, we increase public borrowing once again. However, there is a limit to this spiral of indebtedness, which I get the feeling we have passed long ago, with the resulting danger of the State going bankrupt.

  • Households have learned to live more within their means and borrow less, although loans for consumption are on the rise again lately, at least in absolute terms. A detailed qualitative analysis is required to determine who is getting into debt and why. The unfortunately experiences of families that have lost their homes because they could not keep up with debt repayments have had an impact on civil society in terms of raising awareness of what it means to borrow and the risk inherent in this financial operation. Some parents are even teaching their offspring the values of saving, consuming the minimum, renting a home, not getting into long-term debt and always keeping a reasonable balance between regular wealth generation with respect to borrowing capacity.

  • The economic, social and employment polarization towards a model characterized by great imbalance, predominated by badly paid jobs and unacceptable working conditions in some cases, explains why the OECD’s Economic Wellbeing Index for Spain has decreased between 2008 and 2014. I would predict that this index is going to continue to fall along with a widening social gap, a dramatic reduction of the middle classes, the true driving force behind modern economies.

  • If the State eventually reassesses its approach to public spending in a way that enables it to be more efficient in the use of resources and, as a result, gradually decrease its debt, in the same way as individuals, households and companies have managed to do, having adapted to the age of the credit tap being turned off and learned to live with less, then the volume of borrowing from the financial sector will decrease dramatically. In this hypothetical scenario, how would banks fill their days?

The relations between the magnitudes discussed here are far more complex than they have been presented. The objective of this article is not so much academic rigour but rather an overview of certain interdependencies and contradictions in the economic and financial context that we are currently experiencing to an intense degree, in a way that can be understood by a wide spectrum of readers.

  • PIB