Effects Of Public Debt On Economic Growth – The pandemic sent public debt skyrocketing around the world. However, it is not clear what effect this will have on economic growth

WILL HIGH LEVELS OF PUBLIC DEBT REDUCE ECONOMIC GROWTH? This question was asked by many after the financial crisis of 2007-09, when bank bailouts and fiscal stimulus programs caused debt-to-GDP ratios to rise in developed countries. In 2010, two Harvard students, Carmen Reinhart and Kenneth Rogoff, came up with an engaging answer. Based on data for 44 countries over two centuries, they found that economic growth is roughly halved when public debt exceeds 90% of GDP. Their results were cited by finance ministers in several countries to help justify austerity policies after 2010, although they were then shown to have been slightly inflated by a (now infamous) spreadsheet error. Ms. Reinhart and Mr. Rogoff insist that high debt reduces growth. Ten years after the financial crisis, with debt-to-GDP levels rising rapidly again due to the covid-19 pandemic, should the impact of debt on growth be a concern again?

Effects Of Public Debt On Economic Growth

Many historians suggest that policymakers should not worry too much about the high levels of debt in some advanced economies. For example, Britain’s debt-to-GDP ratio is set to rise from 84% last March to more than 100% this fiscal year. This is high by modern standards, but not unprecedented. At the end of the Napoleonic Wars in 1815, Britain’s national debt was almost 200% of its GDP; by 1914 it had fallen to 25%. After World War II it reached 259% and in America 112%. After brief post-war recessions with declines in arms production, both countries enjoyed periods of strong growth. Over time, they have also managed to reduce their debt load. The US debt-to-GDP ratio fell as low as 31% in the early 1980s. Britain had fallen to around 25% by 1990.

Chart: How National Debt Soared

This is consistent with IMF research which suggests that the direction of the debt-to-GDP ratio, rather than its level, is most important for growth in the long run. The authors of one paper published in 2014 found, as did Ms. Reinhart and Mr. Rogoff, that GDP per person growth is slower in countries with debt-to-GDP ratios above 90% — when the data is considered year-over-year. However, looking at average debt levels over 15-year periods, there is less compelling evidence that countries with debts above 90% of GDP are growing more slowly. Even countries with debt ratios above 200%, such as post-war Britain, have seen solid medium-term growth. Instead, the IMF found that countries with rising public debt ratios experience slower growth than countries with declining ratios – even though their accumulated borrowing is already very high. This may be because large primary deficits (ie without interest payments) make them more vulnerable to credit problems in periods of economic distress.

How can countries reduce their debt-to-GDP ratio over the long term, as America and Britain have done in the past? Whether the post-World War II experience can be repeated is questionable, as our recent public debt briefing pointed out. Around 70% of the reduction in the UK debt to GDP ratio between 1946 and 2008 was due to inflation. It worked because it was coupled with “financial repression,” a regulatory system that, through tools like capital controls and credit rationing, actually forced people to lend to governments at artificially low interest rates while inflation eroded the real value of public debt. . But that is a procedure that is increasingly out of reach for modern policymakers. Technological developments such as the proliferation of cryptocurrencies make it easier for investors to circumvent restrictions on the movement of capital and loans than it was before.

In the long run, governments can rely on economic growth – or, to be precise, growth that exceeds interest rates – to reduce their debt-to-GDP ratio. This would be similar to what happened in Britain after the Napoleonic Wars. Britain did not inflate its debts or run budget surpluses to pay them off (much of the debt was issued in the form of perpetual bonds, which were finally paid off only in 2015). Instead, the compounding effect of real economic growth reduced the weight of the debt burden. As John Ramsey McCulloch, a Scotsman, noted in 1845, “the marvelous inventions and discoveries of Watt, Arkwright, Crompton, Wedgwood, and others have hitherto falsified all the predictions of those who expected national collapse and bankruptcy from the rapid rise of public opinion.” debt.” Those worried about today’s public debt can hope that today’s Watts and Arkwrights will finally save the day. Open Access Policy Institutional Open Access Program Special Issues Guidelines Editorial Process Research and Publication Ethics Article Processing Fees Awards Feedback

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National Debt: Definition, Impact, And Key Drivers

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How Did The U.s. National Debt Get So Big?

Received: 22 April 2019 / Revised: 23 May 2019 / Accepted: 25 May 2019 / Published: 30 May 2019

Based on the concept of sustainable economic development, this study advances debt sustainability research in the economics literature. We examine the correlation between local government debt and regional economic growth in 30 provinces in China. Previous studies have shown that the development of economic growth between regions is not independent, so we investigate the spatial effect of regional economic growth due to the existence of a spatial spillover or spatial expansion effect between regions. Using Moran’s dot plot, LISA (Local Indicator of Spatial Association) map, and semiparametric spatial model (SE-SDM), our results show the following: (1) spatial agglomeration effect has a significant influence on regional economic growth; (2) the relationship between local government debt and regional economic growth has nonlinear characteristics rather than an inverted U-shaped relationship; (3) the semiparametric spatial model more accurately characterizes the nonlinear relationship between local government debt and regional economic growth compared to the basic regression model and the spatial Durbin model; and (4) when the extent of local government indebtedness exceeds a certain level, economic growth will be suppressed by crowding out private investment and reducing public spending.

Financing plays an important role in economic development. Scientists such as Levine [1] and Ziolo et al. [2] considered financing as the lifeblood of economic development and sustainability. Levine [1] hypothesizes that countries with more developed financial systems experience faster economic growth. Financing involving debt (e.g. bank loans, bond issues, etc.) or equity (e.g. own funds, equity financing, etc.) can both benefit and hinder economic development [3]. Over the past decades, several local governments from both advanced and emerging economies have resorted to debt financing in one way or another to support economic development. In the literature, research on local government debt increasingly demonstrates the important role and strategic position of such debt in supporting sustainable regional economic growth [1, 2]. Scholars and economic practitioners have argued that local government debt can jumpstart economic growth through infrastructure spending [4, 5, 6]. Interestingly, a 2013 report by the National Audit Office of China stated that in China, 88.77% of total local government debt was invested in basic infrastructure projects such as municipal facilities [7]. Applying local government debt under the debt ceiling can support the construction of urban and rural infrastructure and stimulate the regional economy [8]. Démurger’s studies of the effect of transport infrastructure and telecommunication facilities on the growth performance of provinces in China reveal a positive significant relationship between the variables [9]. According to Shi and Huang [10], the development of local government infrastructure has a positive impact on economic growth. They believe that when the overall level of infrastructure increases by 1%, the province’s gross domestic product (GDP) can increase by about 0.25%. Proper infrastructure development actually stimulates the effectiveness of regional research and development

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