Pubic debt and growth

Figure 2 shows a histogram of public debt-to-GDP as well as pooled descriptive statistics (inset) for the advanced economies (to compliment the country-specific ones shown in Table 1) over the post World War II period.⁵ The median public debt/GDP ratio is 0.36; about 92% of the observations fall below the 90% threshold. In effect, about 76% of the observations were below the 60% Maastricht criteria.
Put differently, our “high vulnerability” region for lower growth (the area under the curve to the right of the 90% line) comprises only about 8% of the sample population. The standard considerations about type I and type II errors apply here.⁶ If we raise the upper bucket cut-off much above 90%, then we are relegating the high-debt analysis to case studies (the UK in 1946-1950 and Japan in recent years).
Only about 2% of the observations are at debt-GDP levels at or above 120% – and that includes the aforementioned cases. If debt levels above 90% are indeed as benign as some suggest, one might have expected to see a higher incidence of these over the long course of history. Certainly our read of the evidence, as underscored by the central theme of our 2009 book, hardly suggests that politicians are universally too cautious in accumulating high debt levels. Quite the contrary, far too often they take undue risks with debt build-ups, relying implicitly perhaps on the fact these risks often take a very long time to materialise. If debt-to-GDP levels over 90% are so benign, then generations of politicians must have been overlooking proverbial money on the street.
We do not pretend to argue that growth will be normal at 89% and subpar (about 1% lower) at 91% debt/GDP any more than a car crash is unlikely at 54mph and near certain at 56mph. However, mapping the theoretical notion of “vulnerability regions” to bad outcomes by necessity involves defining thresholds, just as traffic signs in the US specify 55mph (these methodology issues are discussed in Kaminsky and Reinhart 1999).
Figure 2. The 90% debt/GDP threshold: 1946-2009, advanced economies
Probability density function

Notes: The advanced economy sample is the complete IMF grouping (Switzerland and Iceland were added). It includes Australia. Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK, and the US. Sources: Reinhart and Rogoff (2009 and 2010a).