Economic Growth and Public Debt: An Experimental Approach in Search of a Confidence Channel

This paper aims at investigating the relationship between public debt and the consumption side of economic growth from an experimental macroeconomics point of view, by analysing whether consumers’ expectations about public debt are linked to tax compliance, consumption, and savings choices, that in turn affect GDP. To this end, we have implemented a laboratory experiment in which the participants earn an income to be allocated between consumption, savings, and voluntary taxation for an unknown number of rounds. Debt’s dynamics arises endogenously within a public good game with threshold: taxation is used to cover a given level of public expenditure, which is equally distributed to the participants at the beginning of each subsequent round. If the collected amount of taxes is lower than required, a deficit is generated, and it feeds public debt. Debt can then be unexpectedly reduced by the government through accessing subjects’ savings. To check for the role of beliefs, participants’ expectations about future debt reduction and perceived debt sustainability are elicited during the experiment. Results show that this experimental framework is characterized by relatively high and often increasing aggregate savings and relatively low and decreasing aggregate consumption. An increase in the debt-reduction expectations and a decrease in the perceived debt sustainability are also found to explain savings and consumption behaviours. These conclusions do not change if tax audits are introduced, but the average savings level lowers, thus increasing subjects’ exposure to the unexpected shocks.