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High National Debt is Shaping Economic Growth. But how?

The relationship between national debt and economic growth is taking center stage due to its varying impact on the financial health of different countries. Understanding the effects of debt on macroeconomic variables has been a question of great importance and has a long history.

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January 25, 2024
5 min read

In this blog post, we will explore the factors of escalating national debt and try to understand the implications of high national debt on various factors that underpin economic growth.

We’ll also dive deep into how we can establish early warning systems to assist governments and public organisations in navigating these unstable economic conditions. Implementing these systems in policy-making can help effectively manage and mitigate the risks and negative impacts of high national debt.

What Is National Debt?

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The national debt is the total amount of money that governments borrow to cover the budget deficits in a fiscal year, plus the principal debt and interest already accumulated on outstanding debt over time. The need for borrowing usually comes when national spending exceeds the national income. Governments also use the terms sovereign, public, or federal debt.

How Do Governments Express National Debt?

Governments commonly measure the national debt as a percentage of the country's total economic output, known as GDP. This method provides a more accurate representation of a country's ability to pay off its debt. For instance, in 2013, the debt-to-GDP ratio in the United States was 100%, meaning the country's debt and GDP were at the same level. However, the debt-to-GDP ratio in the United States currently stands at 123%.

How Can National Debt Be Classified into Main Categories?

The national debt can be classified as marketable, non-marketable, and public or intragovernmental debt.

  • Marketable & Non-marketable securities
    In the secondary market, marketable securities can be sold to other investors, meaning ownership can be transferred. Examples include Treasury bonds and Treasury bills. On the other hand, non-marketable securities have face value and book value, but ownership is not easily transferable because of the non-availability of a secondary market. Regarding security, certain investments, such as government account series bonds, carry less risk.
  • Public & Intragovernmental debt
    Debt held by any person or entity not part of the federal government is called public debt. This includes foreign investors, corporations, state or local governments, etc. However, the debt that one part of the federal government owes to another is called intragovernmental debt.

History of National Debts

Governments have a history of borrowing money to fund various needs, such as securing borders, military campaigns, and filling budget deficits. This practice has evolved over time. In the 19th century, governments borrowed money not only for wars but also to invest in infrastructure and education.

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The 20th century saw a significant increase in debt due to major wars, recessions, and financial crises. Interestingly, the end of the last century witnessed a significant rise in public debt-to-GDP ratios. This increase was primarily driven by public demand for social services, such as pensions and healthcare, rather than by wars or crises. Recently, governments worldwide have faced unprecedented challenges posed by the COVID-19 pandemic. As a result, they have had to implement expansive fiscal policies to stabilise their economies.

Governments have responded to debt in various ways, including debasement and restructuring. Some countries have successfully maintained favourable debt equilibriums through disciplined fiscal policies. Understanding this historical interplay is crucial in navigating the complex dynamics of public debt and its implications for economic growth.

Impact of High Debt to GDP Ratio on Real GDP

The IMF employed advanced statistical techniques to understand the impact of increasing debt-to-GDP ratio on the trajectory of Real GDP. This analysis revealed that unanticipated increases in the public debt-to-GDP ratio exert a negative impact on Real GDP.

As part of its study, the IMF conducted a test by subjecting a typical country in the sample to a median debt-to-GDP ratio shock similar to that experienced during the Global Financial Crisis (GFS). The results showed that a 3.69% point increase in the Debt-GDP ratio led to a decrease of -0.08% in the Real GDP three years after the shock.

While the negative impact looks minimal, it is significant. If all other economic factors are kept constant, it will be challenging for countries to increase Real GDP in the years ahead. The negative impact of growing debt to GDP is realised slowly but takes time to materialise.

Source: IMF Working Paper: Public Debt and Real GDP: Revisiting the Impact

The study also suggests that the impact of public debt on economic output exhibits variability across countries, shaped by their distinctive economic characteristics.

In high-income countries, when the debt-to-GDP ratio increases over time, it negatively impacts the Real GDP. However, this ratio positively impacts economic output in low-income countries and those that have completed debt relief initiatives. Factors such as governance, corruption, and how the government uses debt for future policy considerations are important in combating economic slowdown.

National Debt's Impact on Economic Growth

The ballooning national debt, now at its highest point since World War II, poses significant risks and threats that demand our attention. While some argue that "debt doesn't matter," the reality is quite different. The consequences of ignoring the mounting debt burden can be severe. Let's take a closer look at the risks and threats associated with the ever-growing national debt:

  1. Increasing Inflation
    Deficit spending, particularly due to COVID-19, has led to rapid inflation. The high national debt can put upward pressure on interest rates, leading to a scenario where the dollars in our pockets buy less, ultimately affecting the cost of living for everyone.
  2. Interest Rate Pressure
    Climbing national debt increases government interest payments. This diverts funds away from critical programs and pressures economic interest rates. Higher interest rates can impact everything from mortgages to student loans, hindering economic growth.
  3. Budgetary Constraints
    A significant part of the federal budget goes to paying interest on the national debt.  As interest costs rise, the federal government's ability to invest in new priorities diminishes. This could limit funding for essential programs and initiatives, hampering the nation's progress.
  4. Geopolitical Challenges
    Significant foreign-held debt can expose a country to geopolitical risks. For instance, countries like China, with more than $1 trillion of U.S. debt, gain leverage over the U.S. economy. This dependence on foreign holdings could limit America's ability to navigate global conflicts effectively and independently.
  5. Emergency Response Impairment
    High debt levels hinder effective government response to emergencies. Whether it's a recession, pandemic, or war, the ability to borrow for urgent needs diminishes when the national debt is already soaring. This could leave the nation ill-prepared to face unforeseen crises.
  6. Burden on Future Generations
    Perhaps most concerning is the unfair burden placed on younger and future generations. Increasing national debt results in more interest payments and financial strain for future generations. The federal budget's current favoritism toward seniors over children exacerbates intergenerational imbalances.
  7. Slowed Income Growth
    The Congressional Budget Office (CBO) reports that rising national debt could significantly impact Gross National Product (GNP) per capita.

How to Tackle Escalating National Debt?

Addressing the challenge of soaring public debt requires a strategic and comprehensive approach. These measures should be tailored to each country's unique economic circumstances, ensuring a balanced and practical approach to reducing debt burdens over time.

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1. Timely and Well-Designed Fiscal Consolidation

Countries experiencing high public debt burdens should consider implementing fiscal consolidations during economic expansions. The data indicates that appropriately timed and growth-friendly fiscal consolidations have a high probability of durably reducing debt ratios. These consolidations, ideally involving more expenditure-based measures in advanced economies, can reduce debt ratios by up to 2.1 percentage points cumulatively after five years.

2. Strategic Debt Restructuring

For countries, especially in emerging markets and low-income categories, debt restructuring can be a potent tool to substantially and durably reduce debt ratios. The observed impact of restructuring reveals a reduction of 3.4 percentage points in the first year and 8.0 percentage points cumulatively after five years. This impact is even more pronounced when combined with fiscal consolidation. Countries facing increased risks of debt distress may find debt restructuring necessary, and its success often hinges on its depth and coordination with other policy measures.

3. Building Additional Taxation Capacity for Low-Income Countries

Low-income developing countries need to enhance their capacity to collect additional tax revenues. This is a crucial step to build resilience against unsustainable debt. Enhancing this capacity can help low-income countries efficiently and sustainably service their debt. Though sometimes the additional taxation also results in a slowdown of economic activity, taxing the high-income groups is still advisable rather than hurting national savings.


Well-designed fiscal consolidation, strategic debt restructuring, and growth-enhancing structural reforms are recommended. Maintaining strong institutions, credible fiscal frameworks and transparent debt management strategies are crucial for achieving durable debt reduction and safeguarding economic stability.

What is the importance of having an AI-powered Early Warning System?

In navigating the complex landscape of national debt and its economic implications, having a robust tool like Trendtracker becomes invaluable. This AI-driven platform is an early warning system, facilitating identifying, monitoring, tracking, and analyzing macro forces, risks, and relevant indicators. The proactive capabilities of Trendtracker mitigate the human bias from your risk research by using the power of A.I. Our technology scrapes over 250 million online publications, including articles, reports, research papers, and more, and turns this into insightful information based on your business context.

Trendtracker helps you analyse the impact of government debt, investments, consumption, and other macroeconomic variables on different industries and regions. This gives organisations the power to make informed decisions and achieve strategic excellence, all customised to their business context.

Global Evolution of the Impact of ‘Government Debt’ on ‘All Industries’ compared to ‘Banking,’ ‘Private Equity’ and ‘Insurance’ industries. Source: Trendtracker

Furthermore, you can see below macroeconomic variables impacting economic growth, their current impact represented by strength, change variable, variable's forecasted impact represented by Forecast and Horizon values, which give an estimation of when these trends will mature and reach its peak value, giving you ample insights into when and where would these economic variables impact your business and what should you do about it (represented by our Action-Framework ROESI).

Source: Trendtracker

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