{
  "title": "An Argument for Paying Down Public Debt",
  "publication": "IMF Blog, August 26, 2016",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt",
  "canonical": "https://www.imf.org/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt",
  "overlayPath": "/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/index.md",
  "summary": "Authors: Vitor Gaspar, Julio Escolano",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Vitor Gaspar, Julio Escolano\n- Publication date: August 26, 2016\n- Question addressed: What should governments do about high public debt-to-GDP ratios when viewed from an optimal tax smoothing perspective (abstracting from macroeconomic/business cycle considerations)?"
    },
    {
      "heading": "Context and motivation",
      "content": "- In advanced economies, the debt-to-GDP ratio has reached the highest level on record since 1950.\n- The increase in debt was particularly pronounced since the beginning of the Great Recession due to government rescues of the financial system and stimulus measures, resulting in a substantial increase in general government’s liabilities.\n- Characteristics of the era noted: low inflation, low growth, and bond yields at historical lows.\n- Trade-off emphasized: deleveraging is difficult in this environment, but fiscal policy has been called upon to play a more active role to head off a new mediocre of subpar growth and extremely low inflation."
    },
    {
      "heading": "Literature connection",
      "content": "- Reference to IMF colleagues Ostry, Ghosh, and Espinoza:\n  - Their argument: countries can live with high debt under certain assumptions (for example, continuous access to financing).\n  - They analyze interaction between tax smoothing and productive public investment in determining optimal policy.\n  - Main result: high public debt ratios imply higher tax rates and are bad for standards of living (or growth), but after a sharp debt increase taxes should be raised only to stabilize the debt ratio; pushing taxation further to reduce debt is not optimal because the excess burden of taxation increases more than proportionally to the tax rate.\n  - Policy note: governments should be opportunistic in reducing public debt (e.g., with privatization receipts, licensing royalties, or economic booms yielding exceptionally high revenues)."
    },
    {
      "heading": "Extension in the authors’ working paper",
      "content": "- Simplifications and extensions:\n  - Disregard public investment.\n  - Directly postulate the normative goal of minimizing the excess burden of taxation.\n  - Incorporate empirical fact that financial crises, natural disasters, and wars are repeated events with sizable implications for public finances.\n  - Account for asymmetry in risks to public finances: large, positive disturbances to the public debt ratio are much more likely than negative shocks of similar magnitude (IMF, 2016).\n  - Key intuition: sudden surges in debt ratios (wars, bank bailouts) are more common than sudden drops (privatizations, licenses)."
    },
    {
      "heading": "Empirical documentation of asymmetry (U.S. and U.K., long-run)",
      "content": "- Data examined: historical time series for the United States and the United Kingdom covering the long term (charts referenced for U.S.: Chart 2; for U.K.: Chart 3).\n- Observed pattern (1790 to 2014):\n  - Long periods of persistent, gradual declines punctuated by occasional sharp increases in the debt ratio.\n  - Histograms of changes in the debt ratio suggest the distribution is skewed to the right.\n  - The paper confirms rejection of symmetry via a battery of statistical tests."
    },
    {
      "heading": "Frequency and scale of debt surges (empirical averages)",
      "content": "- United Kingdom:\n  - On average, a (positive) outlier year every 28 years.\n  - Average increase in the debt ratio during outlier year: 30.8 percentage points of GDP.\n  - Average decline in the debt-to-GDP ratio in normal years: 1.3 percentage points of GDP.\n  - Corresponding model normative benchmark: 1.1 percentage points.\n- United States:\n  - On average, a (positive) outlier year every 32 years.\n  - Average increase in the debt ratio during outlier year: 15.4 percentage points of GDP.\n  - Average decline in the debt-to-GDP ratio in normal years: 0.3 percentage points of GDP.\n  - Corresponding model normative benchmark: 0.5 percentage points."
    },
    {
      "heading": "Key findings and policy implications",
      "content": "- Asymmetric risk of large debt-increasing shocks implies a rationale for reducing debt in normal times as insurance against future surges.\n- Optimal tax smoothing requires small but enduring public debt reductions in normal years.\n- Empirical behavior of public debt in the U.S. and U.K. over the last 200 years is close to the normative implications of the model.\n\nSource: \"An Argument for Paying Down Public Debt\", Vitor Gaspar and Julio Escolano, August 26, 2016.\n\n---\n\n Content in this bundle\n\n- Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016\n  - Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Staff Discussion Note\n  - Staff Discussion Note (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Staff Discussion Note (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- recent working paper\n\nSource: https://www.imf.org/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt"
    }
  ],
  "bullets": [
    "[Markdown version](/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/index.md)",
    "[Structured JSON version](/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/index.json)",
    "[Bundle manifest](/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/bundle-manifest.json)",
    "Authors: Vitor Gaspar, Julio Escolano",
    "Published: August 26, 2016",
    "Authors: Vitor Gaspar, Julio Escolano",
    "Publication date: August 26, 2016",
    "Question addressed: What should governments do about high public debt-to-GDP ratios when viewed from an optimal tax smoothing perspective (abstracting from macroeconomic/business cycle considerations)?",
    "In advanced economies, the debt-to-GDP ratio has reached the highest level on record since 1950.",
    "The increase in debt was particularly pronounced since the beginning of the Great Recession due to government rescues of the financial system and stimulus measures, resulting in a substantial increase in general government’s liabilities.",
    "Characteristics of the era noted: low inflation, low growth, and bond yields at historical lows.",
    "Trade-off emphasized: deleveraging is difficult in this environment, but fiscal policy has been called upon to play a more active role to head off a new mediocre of subpar growth and extremely low inflation.",
    "Reference to IMF colleagues Ostry, Ghosh, and Espinoza:",
    "Simplifications and extensions:",
    "Data examined: historical time series for the United States and the United Kingdom covering the long term (charts referenced for U.S.: Chart 2; for U.K.: Chart 3).",
    "Observed pattern (1790 to 2014):",
    "United Kingdom:",
    "United States:",
    "Asymmetric risk of large debt-increasing shocks implies a rationale for reducing debt in normal times as insurance against future surges.",
    "Optimal tax smoothing requires small but enduring public debt reductions in normal years.",
    "Empirical behavior of public debt in the U.S. and U.K. over the last 200 years is close to the normative implications of the model.",
    "**Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016**",
    "**Staff Discussion Note**",
    "[recent working paper](https://www.imf.org/external/pubs/cat/longres.aspx?sk=44200.0)"
  ],
  "related": [
    {
      "title": "Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016",
      "role": "document",
      "sourceUrl": "https://www.imf.org/external/np/pp/eng/2016/050416.pdf",
      "summary": {
        "path": "/external/np/pp/eng/2016/050416.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/external/np/pp/eng/2016/050416.pdf",
        "mime": "application/pdf"
      }
    },
    {
      "title": "Staff Discussion Note",
      "role": "note",
      "sourceUrl": "https://www.imf.org/external/pubs/ft/sdn/2015/sdn1510.pdf",
      "summary": {
        "path": "/external/pubs/ft/sdn/2015/sdn1510.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/external/pubs/ft/sdn/2015/sdn1510.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/index.md",
    "json": "/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/index.json",
    "bundleManifest": "/en/blogs/articles/2016/08/26/an-argument-for-paying-down-public-debt/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-08-27T22:30:15.225Z"
}