## Taming government debt—it can be done, but it ain’t easy

_IMF Blog, September 25, 2013_

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**Canonical URL:** [Taming government debt—it can be done, but it ain’t easy](https://www.imf.org/en/blogs/articles/2013/09/25/taming-government-debt-it-can-be-done-but-it-aint-easy)

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## Bibliographic details
- Authors: Helge Berger, Justin Tyson
- Published: September 25, 2013

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### Overview
- Authors: Helge Berger, Justin Tyson
- Date: September 25, 2013
- Central message: Government debt in advanced economies, elevated after the global economic and euro area crises, will need to be reduced. There is no single “magic” safe debt ratio; reduction comes with trade-offs because cutting spending or raising taxes risks lowering growth and employment in the short term.

### The ins and outs of debt reduction
- Key mechanisms that reduce debt:
  - Higher economic growth increases government revenues, reduces unemployment benefits, and lowers the debt-to-GDP ratio.
  - Fiscal consolidation (reducing government deficits) is the alternative when rapid growth is not available.
- Constraints and complications:
  - Current environment features cautious household spending, stretched bank balance sheets, low inflation, and limited prospects for quickly conjuring high growth.
  - Attempts to raise inflation to reduce real debt could backfire if inflation expectations are not well anchored.
  - Fiscal consolidation in a weak-growth, high-debt context can initially increase the debt-to-GDP ratio because lower demand reduces revenues and the GDP denominator.
  - Lower borrowing costs from credible consolidation rarely offset the short-run demand loss.
  - If a country is losing market access, fiscal effort may need to be front-loaded.
- Empirical findings:
  - Fiscal balances are a key driver of changes in debt-to-GDP ratios, but growth matters strongly.
  - Debt reductions tend to be larger when growth rates are high and interest rates are low.
  - Debt reversals are fewer and smaller when both growth is low and interest rates are high.
  - Only 26 percent of fiscal consolidation efforts (defined as a large adjustment in fiscal balances ignoring interest rate payments) were successful when growth is below a country’s historical average.
  - When growth is above average, the success rate of consolidation increases to 41 percent.

### Past experience — reducing debt when growth is low is possible
- Sample: 26 episodes of debt reductions in advanced economies since 1980.
- Findings from these episodes:
  - Growth and fiscal effort were the main drivers of successful debt reductions.
  - Some episodes achieved large debt reductions despite starting conditions of anemic growth and very high debt burdens.
  - Common factors in successful episodes:
    - Early start to consolidation and persistence through initial weak growth.
    - Continued consolidation as growth recovered, allowing debt to fall.
    - Fortuitous improvements such as falling short-term interest rates, currency depreciation, and solid export growth—channels less available in the current near-zero interest rate, slow global trade environment.

### Policy implications and recommendations
- Pace and design:
  - Consolidation should generally be gradual where possible, supported by credible medium-term plans to spread adjustment over time.
  - If a country is close to losing market access, stronger, front-loaded consolidation may be unavoidable.
- Complementary measures:
  - Enact measures now that increase medium-term growth, including structural reforms.
  - Consider privatization of government assets in some economies to reduce the need for fiscal consolidation.
- Expectations:
  - For most countries, bringing down the public debt-ratio will require a sustained fiscal effort for a number of years.
  - Perseverance with credible plans and strong budget institutions improves the chances that consolidation will pay off over time.

*Source: Taming government debt—it can be done, but it ain’t easy — Helge Berger, Justin Tyson; September 25, 2013.*

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## Content in this bundle

- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2013/sdn1307.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2013/sdn1307.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2013/09/figure-1-dev-in-gross-debt-and-structural-balance-in-adv-economies.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-1-dev-in-gross-debt-and-structural-balance-in-adv-economies.jpg)
- [https://www.imf.org/wp-content/uploads/2013/09/figure-2-avg-annual-contributions-to-reductions-in-debt-under-diff-macro-conditions.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-2-avg-annual-contributions-to-reductions-in-debt-under-diff-macro-conditions.jpg)
- [https://www.imf.org/wp-content/uploads/2013/09/figure-3-components-of-major-debt-reductions-in-adv-economies.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-3-components-of-major-debt-reductions-in-adv-economies.jpg)
- [https://www.imf.org/wp-content/uploads/2013/09/figure-4-evolution-of-key-variables-through-deficit-reduction.jpg](https://www.imf.org/wp-content/uploads/2013/09/figure-4-evolution-of-key-variables-through-deficit-reduction.jpg)

_Source: https://www.imf.org/en/blogs/articles/2013/09/25/taming-government-debt-it-can-be-done-but-it-aint-easy_