Debt and Growth: A Decade of Studies

12 Pages Posted: 11 Sep 2020

See all articles by Jack Salmon

Jack Salmon

affiliation not provided to SSRN

Veronique de Rugy

George Mason University - Mercatus Center

Date Written: April 5, 2020

Abstract

In this policy brief, we review the literature on the debt-growth relationship since the publication of “Growth in a Time of Debt” to evaluate the claim that high government-debt-to-GDP ratios have negative or significant (or both) effects on the growth rate of an economy. In addition, we assess the claim that there is a nonlinear threshold, around 90 percent of GDP, above which debt has a significant deleterious impact on growth rates. With several European countries taking action to successfully reduce their debt-to-GDP ratios in recent years, it is important for Americans to broaden their understanding of the potential negative effects of debt on growth potential, particularly in light of America’s current fiscal trajectory.

A large majority of studies on the debt-growth relationship find a threshold somewhere between 75 and 100 percent of GDP. More importantly, every study except two finds a negative relationship between high levels of government debt and economic growth. This is true even for studies that find no common threshold. The empirical evidence overwhelmingly supports the view that a large amount of government debt has a negative impact on economic growth potential, and in many cases that impact gets more pronounced as debt increases. The current fiscal trajectory of the United States means that in the coming 30-year period, the effects of a large and growing public debt ratio on economic growth could amount to a loss of $4 trillion or $5 trillion in real GDP, or as much as $13,000 per capita, by 2049.

Keywords: Debt, Economic Growth, Public Debt Financing

Suggested Citation

Salmon, Jack and de Rugy, Veronique, Debt and Growth: A Decade of Studies (April 5, 2020). Mercatus Research Paper, Available at SSRN: https://ssrn.com/abstract=3690510 or http://dx.doi.org/10.2139/ssrn.3690510

Jack Salmon (Contact Author)

affiliation not provided to SSRN

Veronique De Rugy

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://www.mercatus.org/scholars/veronique-de-rugy

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