When Should Public Debt Be Reduced?

Author/Editor:

Jonathan David Ostry ; Atish R. Ghosh ; Raphael A Espinoza

Publication Date:

June 2, 2015

Electronic Access:

Free Full text (PDF file size is 1200 KB).Use the free Adobe Acrobat Reader to view this PDF file

Summary:

What considerations should guide public debt policy going forward? Should debt be reduced to achieve normative anchors (such as 60 percent of GDP), should it be increased further to finance a big public investment push, or should the existing debt be serviced forever? We argue that, for countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortive taxes merely to bring the debt down is a treatment cure that is worse than the disease. High public debt of course is costly, but it is a sunk cost only made worse by efforts to pay down the debt through distortionary taxation. Living with the debt is the welfare-maximizing policy. In decisions vis-à-vis the big push for public investment, golden-rule considerations remain salient, with due account taken of the additional servicing costs (and associated distortive taxation) from the resulting buildup of public debt.

Series:

Staff Discussion Notes No. 15/10

Subject:

English

Publication Date:

June 2, 2015

ISBN/ISSN:

9781498379205/2221-030X

Stock No:

SDNEA201510

Price:

$10.00 (Academic Rate:$10.00)

Format:

Paper

Pages:

26

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