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Economic impact of the public debt

  • M. Nautet

    (National Bank of Belgium, Research Department)

  • L. Van Meensel

    (National Bank of Belgium, Research Department)

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    Following the financial and economic crisis, there was a marked increase in the public debt of the euro area countries, the United States, the United Kingdom and Japan. In addition, without a change of policy, the public debt of those countries would maintain an upward trend, a key factor being the rising costs associated with population ageing. The article analyses the risks and implications of the expansion of the public debt currently evident in most of the advanced countries. The difficulties which certain euro area countries are experiencing in raising finance on the markets illustrate some of those risks. After outlining the movement in the public debt in the advanced countries in recent years, a simulation is produced in view of showing the future debt pattern in the absence of any change of policy. This exercise clearly highlights the potentially exponential growth of the public debt in most of the advanced countries. Next, the impact of the public debt on economic activity and inflation is examined. That impact appears to be very heavily dependent on the circumstances, which may vary greatly over time and between countries. When looking at the impact of the pattern and size of the public debt on economic activity, it is always important to distinguish between the short and the long term. Finally, the article sets out the need for fiscal consolidation and appropriate strategies for achieving that. The strategy focuses on three aspects: fiscal consolidation aimed at reducing the public debt, boosting the employment rate and productivity, and reform of the pension systems, health care and care of the elderly. For most of the advanced countries, large-scale reform programmes will be necessary in order to restore sustainable public finances. Some countries have already implemented consolidation measures, while others have yet to put most of the measures in place.

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    File URL: https://www.nbb.be/doc/oc/repec/ecrart/ecorevii2011_h1.pdf
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    Article provided by National Bank of Belgium in its journal Economic Review.

    Volume (Year): (2011)
    Issue (Month): ii (September)
    Pages: 7-19

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    Handle: RePEc:nbb:ecrart:y:2011:m:september:i:ii:p:7-19
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    1. D. Dury & G. Langenus & K. Van Cauter & L. Van Meensel, 2009. "The economic recovery plans," Economic Review, National Bank of Belgium, issue iii, pages 59-73, September.
    2. S. Rao Aiyagari & Ellen R. McGrattan, 1994. "The optimal quantity of debt," Working Papers 538, Federal Reserve Bank of Minneapolis.
    3. Manmohan S. Kumar & Emanuele Baldacci, 2010. "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," IMF Working Papers 10/184, International Monetary Fund.
    4. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
    5. Fabrizio Balassone & Jorge Cunha & Geert Langenus & Bernhard Manzke & Jeanne Pavot & Doris Prammer & Pietro Tommasino, 2011. "Fiscal sustainability and policy implications: a post-crisis analysis for the euro area," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 3(2), pages 210-234.
    6. Giancarlo Corsetti & Keith Kuester & André Meier & Gernot J. Müller, 2010. "Debt Consolidation and Fiscal Stabilization of Deep Recessions," American Economic Review, American Economic Association, vol. 100(2), pages 41-45, May.
    7. E. De Prest & B. Eugène & L. Van Meensel, 2010. "Strategies and measures aimed at consolidating public finances," Economic Review, National Bank of Belgium, issue ii, pages 39-59, September.
    8. Checherita-Westphal, Cristina & Rother, Philipp, 2010. "The impact of high and growing government debt on economic growth: an empirical investigation for the euro area," Working Paper Series 1237, European Central Bank.
    9. L. Van Meensel & D. Dury, 2008. "The use and effectiveness of fiscal rules and independent fiscal institutions," Economic Review, National Bank of Belgium, issue ii, pages 69-84, June.
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