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The debt ratio is declining...not for long

Dernière mise à jour : 4 avr. 2023




It is good that The IMF starts to deviate from the Blanchard’s ideology, fiscal deficit is (always) good and it is time to go into deficit since r-g is negative (perhaps r-g is negative, but the primary balance is also largely negative).


It is true that for most developed countries, the gross debt ratio fell from 2020: France, gross debt ratio from 2020 (114.6% of GDP) to 2022 (111.8%) -2.8 percentage points of GDP. Italy (from 141.8% to 135.4%), -6.4 points. The UK (from 102.6 to 87), -15.6 points and for the US (134.5 to 122.1 points), -12.4 points. With the exception of Germany, +3.1 points (source: IMF/WEO, October 2022).




Higher inflation has boosted the denominator (GDP) and inflation increased tax revenue in developed countries (income taxes are very sensitive to price increase). On the opposite, public spending are less sensitive to inflation and will take time to catch up (public wages do not increase immediately in real terms).


According to the IMF, there is a lag in the adjustment of the nominal interest rate (unexpected inflation). But this lag has disappeared and unexpected inflation has turned into expected inflation which is reflected into the nominal interest rate. Yields on government bonds are rising (from 1.1% at the start of 2021 to 3.5% today for 10-years US government bonds) and will affect the public-service as old loans are rolled over at the higher interest rate); therefore, there is a normal lag in the increase of the debt ratio. So the fiscal deficit is artificially lower.


The main issue (unseen by Keynesians) is the composition of the public debt. In France, public debt is mainly used to finance recurrent expenses (mainly salary and public transfer). Public transfer to finance pensions (public pensions account for one quarter of public expenditure, public investment less than 3%). I have shown that the pension deficit accounted for 45% of the general government deficit in 2021 (although officially, there is no deficit in the pension system that year…) I am not sure that financing pensions with debt is an investment for the country and for…future generations. Instead of thinking in terms of fiscal impulse and multiplier (Keynesian approach), it would be useful to start thinking in terms of the quality of public spending.


For developing countries, the issue is different, generally, their debt is made up of public investments (good, you will say), yes, but most of the time these public investments have low or even negative economic and financial returns.


Therefore, the IMF should convince rich (and poor) countries to look at the composition of their public debt. Econometric exercises are useless, it is through a patient, country-by-country analysis of the composition of the public debt stock and its impact on growth that debt sustainability can be assessed on a micro level.


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