The Motives to Borrow

IMF Working Papers, May 10, 2019

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"Governments issue debt for good and bad reasons. While the good reasons—intertemporal tax-smoothing, fiscal stimulus, and asset management—can explain some of the increases in public debt in recent years, they cannot account for all of the observed changes. Bad reasons for borrowing are driven by political failures associated with intergenerational transfers, strategic manipulation, and common pool problems. These political failures are a major cause of overborrowing though budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow. While it is difficult to establish a clear causal link from high public debt to low output growth, it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation."

Good motives for borrowing identified: intertemporal tax-smoothing, fiscal stimulus, and asset management.
These good motives "can explain some of the increases in public debt in recent years" but "cannot account for all of the observed changes."
Bad motives linked to political failures: intergenerational transfers, strategic manipulation, and common pool problems.
Political failures are "a major cause of overborrowing."
"Budgetary institutions and fiscal rules can play a role in mitigating governments’ tendencies to overborrow."
Evidence on macroeconomic costs: "it is difficult to establish a clear causal link from high public debt to low output growth," but "it is likely that some countries pay a price—in terms of lower growth and greater output volatility—for excessive debt accumulation."

Strengthen budgetary institutions to mitigate overborrowing driven by political failures.
Implement and enforce fiscal rules as a tool to constrain tendencies toward excessive debt accumulation.
Recognize limits of attributing low output growth directly to high public debt; nonetheless, monitor debt trajectories to avoid potential losses in growth and higher output volatility.