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Reducing Government Debt Ratios in an Era of Low Growth

Author

Listed:
  • Paolo Mauro

    () (Peterson Institute for International Economics)

  • Jan Zilinsky

    () (Peterson Institute for International Economics)

Abstract

Almost a decade after the onset of the global crisis, government debt-to-GDP ratios in the advanced economies have stabilized well above their precrisis levels. Living with high debt is living dangerously: When government debt is large, an increase in interest rates causes a sizable rise in the cost of debt service and therefore in the risk of financial crisis brought about by an interest rate–debt spiral. Reducing high debt ratios poses a daunting challenge, because the range of options for reducing debt is more limited than it once was and economic growth in the next decade is expected to be lower—as a result of population aging and the lingering effects of the crisis—than it was before the global crisis. Declines in the long-run economic growth rate drive increases in the government debt-to-GDP ratios and lead to fiscal crises, including defaults. Past studies have underestimated—in tone, if not necessarily in substance—the role of economic growth in determining the path of debt ratios. This Policy Brief proposes an extended accounting approach that fully recognizes the importance of economic growth in this regard, by keeping track of the impact of growth on the primary fiscal surplus. It concludes that a gradual but sustained fiscal adjustment through expenditure cuts and revenue increases is the most appropriate means of reducing the chances of debt crisis in the coming decade.

Suggested Citation

  • Paolo Mauro & Jan Zilinsky, 2016. "Reducing Government Debt Ratios in an Era of Low Growth," Policy Briefs PB16-10, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb16-10
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    File URL: https://piie.com/publications/policy-briefs/reducing-government-debt-ratios-era-low-growth
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    Citations

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    Cited by:

    1. Mariana Colacelli & Emilio Fernández Corugedo, 2018. "Macroeconomic Effects of Japan’s Demographics: Can Structural Reforms Reverse Them?," IMF Working Papers 18/248, International Monetary Fund.
    2. Antonio Bassanetti & Carlo Cottarelli & Andrea F Presbitero, 2019. "Lost and found: market access and public debt dynamics," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 445-471.
    3. Antonio Fatás & Atish R. Ghosh & Ugo Panizza & Andrea F Presbitero, 2019. "The Motives to Borrow," IMF Working Papers 19/101, International Monetary Fund.
    4. repec:aka:aoecon:v:68:y:2018:i:2:p:209-229 is not listed on IDEAS
    5. Kovács, Olivér, 2017. "Az ipar 4.0 komplexitása - I
      [The complexity of industry 4.0 - Part 1]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 823-851.
    6. Chen, Shyh-Wei & Wu, An-Chi, 2018. "Is there a bubble component in government debt? New international evidence," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 467-486.
    7. Barry Eichengreen & Asmaa El-Ganainy & Rui Esteves & Kris James Mitchener, 2019. "Public Debt Through the Ages," NBER Working Papers 25494, National Bureau of Economic Research, Inc.
    8. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2018. "Public Debt and Economic Growth: Further Evidence for the Euro Area," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 68(2), pages 209-229, June.

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