The U.S. Public Debt - Implications for Growth


WP/94/4-EA





The U.S. Public Debt: Implications for Growth by Carlos M. Asilis

The effects of future taxes on economic growth will differ according to
the mix of factors of production on which taxes are levied. Calculations of
such effects change according to the factors on which taxes are levied
(physical versus human capital); the magnitude of depreciation rates for
both types of capital; the tax treatment of inputs in sectors producing
human capital; and share parameters in input-producing sectors.

This paper examines quantitatively the implications of the current U.S.
public debt-to-GDP ratio for economic growth. The analysis extends a
general endogenous growth model to account for the Government's solvency
constraint. It finds that while further increases in the U.S. public debt
may negatively affect long-run economic growth, the order of magnitude of
such effects is likely to be rather small and is likely to be highest at
debt-to-GDP ratios substantially higher than the current one (in the 200 to
250 percent range).

The effects of fiscal corrections on economic growth are derived by
using alternative measures of the debt-to-GDP ratio, gross and net of
approximate adjusted present values of social security liabilities. The
results are of interest not only because, by providing bounds, they
constitute a benchmark against which one can rule out some fiscal correction
plans but also because of the sensitivity of growth effect calculations in
nondebt settings.