A New Relationship Between Economic Growth and Government Debt Sustainability (in Japanese “Keizaiseicho to zaiseishi no atashii kankei”)

Ryo Horii

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: “Fiscal consolidation cannot be achieved without economic growth,” is a symbolic statement by the Japanese government, announced repeatedly in the last two decades. However, the actual plan accompanied by this statement was to implement austere fiscal policy in successive years to regain a positive primary balance. This article argues that such an attempt could be one reason Japan failed to achieve either fiscal consolidation or economic growth for the last 30 years. We explain the debt sustainability condition considering the possibility that the growth rate is higher than the interest rate, typically observed in advanced countries in the post-war period. In this definition, debt sustainability depends more sensitively on the GDP growth rate than the primary balance. Reductions in growth-enhancing public investment will worsen debt sustainability even when they improve the primary balance, confirming the initial statement.

Date: 2023-06
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1209

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