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The impossible puzzle: how to reduce debt without growth


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the connundrum that wont soon go away softly into the night, unfortunately:


<<The sustainable level of debt depends upon the existing level of public debt (as per cent of gross domestic product, the current budget position (per cent of gross domestic product, interest rates and growth rates as follows: Changes in government debt = budget deficit + [(Interest Rate – GDP growth) times debt]


Italy illustrates the relationship between debt levels and growth. Assuming average borrowing costs of 4 per cent and a debt to GDP ratio of 120 per cent, Italy needs to grow at 4.8 per cent just to avoid increasing its debt burden where its budget is balanced.


At current market borrowing costs of 6 per cent, Italy has to grow at a 7.2 per cent just to avoid increases in its debt levels. With a projected growth rate of only of 1 per cent to 2 per cent at best, Italy must reduce its debt levels significantly to avoid the risk of insolvency.


Assuming interest costs of 4 per cent and growth of 2 per cent, Italy would have to run a budget surplus of 5 per cent per annum for 10 years to reduce its debt to 90 per cent of GDP.


The UK's current net debt, ignoring measures to support the financial sector, is around £1,000bn (around 63 per cent of GDP). Interest costs are around £49bn, equivalent to 5 per cent per annum (around 3 per cent of GDP and 10 per cent of tax revenue). Assuming government revenues equal expenditures, Britain must grow at 3 per cent per annum just to ensure its debt levels do not rise.


In the UK, significant cuts in government spending and higher taxes to bring the budget into balance have contributed to slower growth, in turn increasing the budget deficit driving higher government borrowing requirements and overall debt levels.


The link between growth and debt levels highlights the vulnerability of any indebted economy.


Economies with debt are forced to run a budget surplus (through spending cuts and tax increases), grow at very high rates, decrease borrowing costs or combination of these to merely stabilise debt levels. Where growth slows, indebted governments can become trapped in a self-defeating cycle of ever greater cycle of austerity which compound rather than solve the problem of debt or public finances.>>











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The original article is also wrong as inflation will help moderate the debt load.


assuming negative real rates of interest prevail, then that would indeed slowly chisel away at the over all burden of their debt carry. otherwise...?

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Italy needs to grow at 4.8 per cent just to avoid increasing its debt burden where its budget is balanced.


Fortunately that's not necessary.  The budget does not need to be balanced, it just needs to grow debt no faster than GDP.


you're saying that as long as they manage to grow GDP faster than than their debt then the burden becomes progressively lighter over time? that sounds about right but walking a thin tightrope is still fraught with pitfalls.

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  • 8 years later...

Inside the $2.5 Trillion Debt Binge That has taken S&P 500 Titans including Boeing and AT&T From Blue Chips To Near Junk


In the boom years before the pandemic, the Fed encouraged S&P 500 titans to binge on trillions in debt, now the central bank is propping them up to avoid an economic catastrophe.



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