Public Debt and Growth: An Assessment of Key Findings on Causality and Thresholds

How Does Public Debt Affect Economic Growth?

The COVID-19 crisis will increase fiscal deficits worldwide, both from the action of automatic stabilizers such as reduced tax revenue and unemployment insurance and from enhanced stabilization and recovery efforts such as the three COVID-19 bills already enacted by the U.S. Congress, with a fourth measure already under consideration. Government debt levels will therefore also be increasing worldwide. What are likely to be the consequences of rising public debt on economic growth? Working with contemporary data, this paper by UMass economists Michael Ash, Deepankar Basu and Arin Dube shows that the effects of public debt on GDP growth are generally quite small.

The COVID-19 crisis will increase fiscal deficits worldwide, both from the action of automatic stabilizers such as reduced tax revenue and Unemployment Insurance and from enhanced stabilization and recovery efforts such as the two COVID-19 bills already enacted by the U.S. Congress, the Coronavirus Preparedness and Response Supplemental Appropriations Act and the Families First Coronavirus Response Act as well as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) now under consideration. With large fiscal deficits and a worsening growth outlook, public debt is likely to increase. Public decision makers need guidance on the consequences of public debt for economic growth. The analysis by Ash, Basu, and Dube concludes, "the effect of public debt on GDP growth is small and is zero in recent data."

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