## When Should Public Debt Be Reduced?

_Staff Discussion Notes, June 1, 2015_

## Source details

**Canonical URL:** [When Should Public Debt Be Reduced?](https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/when-should-public-debt-be-reduced-42931)

## Other formats

- [Markdown version](/en/publications/staff-discussion-notes/issues/2016/12/31/when-should-public-debt-be-reduced-42931/index.md)
- [Structured JSON version](/en/publications/staff-discussion-notes/issues/2016/12/31/when-should-public-debt-be-reduced-42931/index.json)
- [Bundle manifest](/en/publications/staff-discussion-notes/issues/2016/12/31/when-should-public-debt-be-reduced-42931/bundle-manifest.json)

## Bibliographic details
- Authors: Jonathan David Ostry, Atish R. Ghosh, Raphael A Espinoza
- Published: June 1, 2015
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781498379205.006

---

### Main argument
- For countries with ample fiscal space (little risk of encountering a fiscal crisis), raising distortionary taxes merely to bring the debt down is a treatment cure that is worse than the disease.
- High public debt 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 such circumstances.

### Key findings
- Normative anchors (such as 60 percent of GDP) should not automatically dictate debt reduction when fiscal space is ample.
- Decisions about whether to increase debt to finance a big public investment push must account for the additional servicing costs and the associated distortionary taxation from the resulting buildup of public debt.
- Golden-rule considerations remain salient when evaluating public investment versus debt servicing.

### Policy recommendations
- Do not raise distortionary taxes solely to reduce existing public debt in economies with ample fiscal space.
- When considering a large public investment push funded by borrowing, explicitly account for:
  - the additional debt-servicing costs, and
  - the distortionary taxation required to service that additional debt.
- Apply golden-rule principles to ensure public investment returns justify the additional borrowing and servicing burden.

### Considerations and conceptual points
- Debt reduction should be guided by country-specific fiscal space and crisis risk, not by universal numeric anchors alone.
- The welfare-optimal choice can be to "live with the debt" rather than incur welfare losses through distortionary fiscal consolidation.
- The tradeoff between public investment benefits and the costs of increased debt servicing is central to the decision framework.

*When Should Public Debt Be Reduced? — Jonathan David Ostry, Atish R. Ghosh, Raphael A Espinoza; June 1, 2015.*

---

## Content in this bundle

- **_sdn1510**
  - [_sdn1510 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1510.pdf.md){rel="alternate" type="text/markdown"}
  - [_sdn1510 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/sdn/2015/_sdn1510.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/when-should-public-debt-be-reduced-42931_