Interest Rates, Growth and Public Debt Sustainability

2023-10-17T00:00:00+02:00

The sustainability of public debt depends on its long-term trajectory. This trajectory depends in turn on fiscal policies (i.e. the accumulation of annual primary balances) and the differential between the interest rate (r) and the growth rate of GDP (g).

If the primary balance is zero, the ratio of debt as a percentage of GDP increases, if the interest rate is greater than the growth rate (r–g>0) and it decreases in the opposite case. In the case of a primary deficit, the effect is more ambiguous: a positive r–g differential accelerates the increase in the debt ratio, while a negative differential contains the increase in the ratio and may even reduce it in some cases.

For France, and other major advanced countries, the interest rate-growth differential has been very volatile and positive over long periods (see Chart). Since the end of the 1990s, the interest rate-growth differential has narrowed for structural reasons, notably with excess savings at the global level which lowered risk-free interest rates, and even became negative in the past decade.

As measured by nominal borrowing rates, the differential could turn positive again in certain advanced economies as soon as 2023-2024, given the factors impeding growth and the surge in interest rates. As measured by the implicit interest rate, meaning the average cost of debt, the differential should remain negative in the medium term.

Caution is called for when using the observed interest rate-growth differential as a fiscal policy indicator, since it is impossible to foresee its future values. Furthermore, a negative interest rate-growth differential is not, generally speaking, sufficient to contain government debt in the presence of a primary deficit.

History shows that the link is not one-way, because the interest rate-growth differential is affected by the debt ratio: the greater the increase in the debt ratio, the greater the increase in the r–g differential.

Public Deficit on Target in 2022 Despite the Energy Crisis

2023-07-28T00:00:00+02:00

The 2022 public deficit published by the National Institute of Statistics and Economic Studies (INSEE) on 31 May 2023 stood at 4.7% of GDP. This figure is close to the 5.0% of GDP target set out in the 2022 Budget Bill, as revised on 22 October 2021, and upheld in the two 2022 Supplementary Budget Acts.

However, an imported inflation shock of more than 4 percentage points in 2022 had a strong impact on revenues and expenditure through several channels.

Spontaneous growth of taxes and social security contributions outstripped GDP growth by a wide margin. This major stylised fact was incorporated into the forecasts in the first 2022 Supplementary Budget Bill in July 2022. It stemmed primarily from the components of growth, the strength of wage growth and the large increase in taxable corporate profits in 2021, which has a lagged impact on government revenues.

The inflation shock affected expenditure in two main ways: (i) the indexation of certain expenditure; (ii) the measures implemented since the end of 2021 to protect businesses and households from inflation.

In the fourth quarter of 2021, it was impossible for the Budget Bill to foresee the scale of the energy shock or the measures that would be introduced to support households and businesses. However, the capacity for rapid revisions of forecasts to allow proportionate discretionary tax measures and resolute commitments to the deficit target made it possible to attain a deficit that was close to the original target, despite the shocks affecting revenue and expenditure (see Chart).

Trésor-Info - Publications de la direction générale du Trésor - Fiscal-policy

Interest Rates, Growth and Public Debt Sustainability

Public Deficit on Target in 2022 Despite the Energy Crisis