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Public debt and economic growth: There is no ‘tipping point’

Eberhardt, M. and Presbitero, A., (2013), “Public debt and economic growth: There is no ‘tipping point’”, VoxEU, 17 November.

The idea that there is a common tipping point in the relationship between public debt and economic growth is still widespread. However, this is likely due to a misinterpretation of the existing evidence. Once we allow for the relationship between debt and growth to be country-specific, there is limited evidence supporting the presence of a within-countries debt threshold.

The presence of a common threshold, or ‘tipping point’ – beyond which the detrimental impact of debt on growth is significant, or significantly increases – is currently taken as given in many policy circles. In the US, although many political battles impinge on the Congressional debate over the debt ceiling and the resulting government shutdown of October 2013, this somewhat reflected a widespread belief that debt is dangerous, and that fiscal austerity represents the only way of restoring sustainable growth. In the UK, Chancellor George Osborne displayed a similar sentiment when telling his annual party conference in Manchester this year that dealing with the repercussions of the financial crisis is not over “[u]ntil we’ve fixed the addiction to debt that got this country into this mess in the first place” (emphasis added). Without a doubt, these strong convictions and ensuing actions were strongly influenced by the work of Carmen Reinhart and Ken Rogoff (2010a), who were among the first to suggest a debt-to-GDP threshold of around 90%, beyond which economic growth is seriously affected by the debt burden.

A large debate about fiscal austerity and the relationship between debt and growth – also featured on Vox – followed the work by Reinhart and Rogoff. Recently, Ken Rogoff has come back to the issue, arguing that he and Carmen Reinhart never suggested that their results should be “interpreted as saying that a country would suddenly experience a significant change in expected growth as it crossed the 90% threshold”. However, we observe that in policy circles, among academics, and in the media, the message of a common 90% debt threshold is still very widespread.

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