The manner in which debt builds up can be important from the perspective of its economic impact, as well as of the subsequent exit strategy. If the government is borrowing to invest in public services like transport and education. The aim of the study was to investigate the impact of external debt on economic growth. New evidence from South Africa, Long-run implications of alternative fiscal policies and the burden of the national debt, Preferred reporting items for systematic reviews and meta-analyses: the prisma statement, Impact of external debt shocks on economic growth in nigeria: a svar analysis, Human capital, public debt, and economic growth: A political economy analysis, The effect of government debt and other determinants on economic growth: The Greek experience, Government debt and economic growth: A threshold analysis for Greece, An empirical characterization of the effects of public debt on economic growth, The impact of public debt on economic growth in the Israeli economy, The relationship between external debt and economic growth: Empirical evidence from Ukraine and other emerging economies, Panel data analysis of public and private debt and house price influence on GDP in the European Union countries, The impact of government debt on economic growth: An empirical investigation of the Lebanese market, The global competitiveness Report 2017–2018. Fewer Economic Opportunities for Americans. Each of the 223 articles was assessed based on the titles, abstracts and the main contents. Only articles suitable for the inclusion criteria were retained. A conceptual gap was noted in which all the research publications ignored the impact of intervening variables on the relationship between the predictor variables and the output variables. (2009). Readers Question: What is the impact of persistent national debt on economic growth? However, if not managed properly, public debt could also harm the economy. The whole process of the selection of 33 articles is illustrated in Figure 1. Linear positive relationship means that the economy is able to grow as the debt level increases. The information which is gathered from the review is then coded in order to help in the interpretation of the findings and to address the potential gaps that exist in the current literature. Bond yields fell because markets were keen to buy government bonds. Is there a debt-Threshold effect on output growth? Since each country has its own uniqueness and capabilities, a standard threshold cannot be applied to all. Click the OK button, to accept cookies on this website. However, if the government borrowing is to finance transfer payments e.g. Register to receive personalised research and resources by email, How does public debt affect economic growth? Non-relevant articles are to be excluded from the study to ensure the reliability of the outcome. Even though this view has a negative perspective on public debt to economic growth, it also has a positive standpoint on the two series. Therefore economic growth helps to reduce government borrowing. It is proven empirically by looking at the case of developing countries, in which the debt threshold was found at 88.2% (Karadam 2018). People also read lists articles that other readers of this article have read. However, the use of the same method does not guarantee the same results. For this study, only journal articles published in English (in the final stage) from 2017 to 2019 were included. Besides, the other objective is to simplify the previous findings by assessing the major consensus on how public debt affects economic growth. For debt-to-GDP above 95%, additional debt has a negative impact on economic activity. You are welcome to ask any questions on Economics. Besides, the 90% threshold as argued in the Reinhart-Rogoff hypothesis is also not applied across all countries. On the other hand, a linear negative relationship indicates that the economic growth is declining when the country increases its debt level. Growing debt also has a direct effect on the economic opportunities available to every American. In a recession, crowding out is unlikely to occur because there are unemployed resources. As a result, the investors would prefer to channel their investments into other developing economies that costs lower to run a business. The literature too revealed a lack of agreement on the overall impact of public debt components on economic growth. In the time series analysis, the Autoregressive Distributed Lag Model (ARDL) is widely used by previous researchers (Burhanudin, Muda, Nathan, & Arshad, 2017; Maitra, 2019; Mhlab & Phiri, 2019). Based on previous literature, public debt can either positively or negatively affect the whole economy. These higher taxes and lower spending will have the affect of reducing UK economic growth and could even damage any economic recovery. The inclusion and exclusion criteria. Two of the three studies which revealed the non-existence of non-linear relationship were conducted in the early years of 1851 in Spain (Esteve & Tamarit, 2018) and 1960 onwards in Organization for Economic Cooperation and Development (OECD) and non-OECD countries (Arčabić et al. The economy has been affected negatively with debt accumulation and debt is a causing factor for poor growth and limited investment. The previous literature captured the threshold effect by including the square term of debt in the growth equation (Ahlborn & Schweickert, 2016; Butkus & Seputiene, 2018) or by conducting the panel smooth transition regression (Chen, Yao, Hu, & Lin, 2016; Karadam, 2018). Due to the lack of information on these economies, more attention needs to be channeled towards them since they require a massive amount of fund to groom their economies and uplift their economic status to a higher level. On the other hand, public debt can also contribute to higher economic growth, for instance, Malaysia (Burhanudin et al., 2017) and European countries (Gómez-Puig & Sosvilla-Rivero, 2017a). Hence, there is room to investigate these economies since some of the countries within these economies are facing a problem of low capital accumulation. By referring to Table 4, this relationship exists in highly indebted countries such as Sri Lanka and Nigeria (lower-middle-income economies), South Africa (upper-middle-income economies) as well as high-income economies such as Japan, United States, United Kingdom and European countries. The non-linear relationship exists in the European countries (Brida, Gómez, & Seijas, 2017; Gómez-Puig & Sosvilla-Rivero, 2017b; Pegkas, 2018, 2019) and emerging economies (Shkolnyk & Koilo, 2018). Therefore, public debt is the only feasible option to finance government expenditures and other development projects if the country lacks funds. In this case, these countries may not be able to pay back the debt within the stipulated time period. Although the majority of the surveyed literature supports the negative effect of public debt on economic growth, several other studies have found a long-run positive impact of public debt on economic growth through the fiscal multiplier effect. High growth helps to reduce it (improved tax returns less spending on benefits). Expansionary monetary policy can help to counteract the fiscal policy. The economy is able to grow positively when the debt level is below the threshold. This article talks about how government spending can increase aggregate demand, and is very interesting. a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Out of 33 articles, 15 of them were using time series analysis, while the remaining 18 articles were employing panel data analysis. Apart from studies that have found nonlinear impact of public debt on economic growth, there is a large body of empirical work that supports a negative impact between these two variables. The annual data series over the period 1972-2010 has been used. Without these important investments, the economic growth will be stagnant and the countries will become less competitive with investments being channeled into traditional production methods (World Economic Forum, 2017). – from £6.99. There is a flaw in this argument, as follows. For instance, there is a negative relationship found between public debt and economic growth in Sri Lanka and South Africa (Maitra, 2019; Mhlab & Phiri, 2019). Richard Kahn introduced the Keynesian multiplier in 1930. pensions and health care to an ageing population then there will be no boost to productive capacity from government borrowing, and the borrowing will be less sustainable. This is because with high levels of debt – higher interest rates will be required to attract people to buy government debt. Figure 1. Our data allow us to look at the impact of household, non-financial corporate and government debt separately.1 Using variation across countries and over time, we examine the impact of the movement in debt on growth.2 Our results support the view that, beyond a certain level, debt is bad for growth. a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. The scale of UK government borrowing means that to reduce the debt burden, the government will have to increase taxes and/or cut spending over the next 3-4 years. Table 2. Regardless of the type of public debt, the majority of the articles that discussed the relationship between public debt and economic growth from 2017 to 2019 demonstrated a significant negative relationship between the two series. Even if a country was found to have a positive relationship between public debt and economic growth, the government should still be cautious in designing their fiscal policy by investigating the best level of debt to be borrowed from time to time. On the other hand, a high-income country with a high debt level might consider to increase taxes to replace the debt if the debt level is unmanageable. The five inclusion criteria include the year, document type, publication stage, source type and language. It finds a non-linear impact of debt on growth with a turning point – beyond which the government debt-to-GDP ratio has a negative impact on long-term growth – at about 90–100% of GDP. Since debt overhang exist when a country exceeds its repayment ability, it can be suggested that, expected debt service is an increasing function of country’s output level (Krugmanv1988; Sachs 1989). Once the debt threshold is reached, further increase in the debt level will slow down the economic growth. The foreign debts are important to determinants of economic performance of a country. We have use regression test and find out that debt servicing is positively effecting the growth of Pakistan. Table 4. This will be distributed a… The Reinhart-Rogoff hypothesis argued that public debt can positively affect the economic growth if the debt to GDP level is lesser than 90% (Reinhart, Reinhart, & Rogoff, 2015). Due to the above findings, different countries should design their own fiscal initiatives to combat higher public debt and stimulate economic growth. The economic growth could turn out to be negative if the funds are not being managed properly. During the assessment of the relationship between public debt and economic growth, the findings from the 33 articles were tabulated based on two main themes and nine sub-themes. This paper intends to examine whether there exists a mutual consensus on the effects of public debt on the economic growth of a country or group of economies. The negative relationship is consistent with the conventional view of debt (Elmendorf & Gregory Mankiw, 1998), in which there will be a crowding-out effect on the private investment when the economy is facing high debt problem (Bahal, Raissi, & Tulin, 2018; Chudik, Mohaddes, Hashem Pesaran, & Raissi, 2017; De Vita, Trachanas, & Luo, 2018; Kim, Ha, & Kim, 2017; Shahor, 2018). As a result, 33 articles were selected for the systematic review since they suited to the objective of this study. High growth helps to reduce it (improved tax returns less spending on benefits) UK national debt. Public and private investment in India. The study has been made by using the ARDL (Auto- Regressive Distributive Lag model) model to check the The findings were discussed in the next section of this paper. This paper tried to investigate the impact of foreign debt on growth in Bangladesh. Increase in national output. Among them were the European countries (Gómez-Puig & Sosvilla-Rivero, 2017b) and advanced economies such as Belgium, Canada, United Kingdom and United States (Lee, Park, Seo, & Shin, 2017). impact of debt on economic growth. An increase in the interest rate will demotivate investors from investing in a country. High debt has not been a barrier to economic growth in the past. The main themes and sub-themes for the relationship between public debt and economic growth. Cited by lists all citing articles based on Crossref citations.Articles with the Crossref icon will open in a new tab. If it continues to increase in the long run, the effect can switch to becoming negative. How does public debt affect economic gro .... https://doi.org/10.1080/23311975.2019.1701339, https://www.un.org/sustainabledevelopment/, TITLE-ABS-KEY ((”public debt” OR ”government debt”) AND (”economic growth” OR ”GDP” OR ”national income”)) AND (LIMIT-TO (PUBSTAGE, ”final”)) AND (LIMIT-TO (PUBYEAR, 2019) OR LIMIT-TO (PUBYEAR, 2018) OR LIMIT-TO (PUBYEAR, 2017)) AND (LIMIT-TO (DOCTYPE, ”ar”) OR LIMIT-TO (DOCTYPE, ”re”)) AND (LIMIT-TO (LANGUAGE, ”English”)) AND (LIMIT-TO (SRCTYPE, ”j”)), Book chapter, review, conference paper, book, editorial, business article, conference review, erratum and short survey, Books, conference proceedings, book series and trade publications, High-income economies (including European Union countries). National Debt is the sum of both types of debt. Based on Table 3, very limited research on the relationship between public debt and economic growth have been conducted specifically on the low-income economies, lower-middle-income economies and upper-middle-income economies. Therefore, attention should be given to low, lower-middle-income and middle-income economies as they might be facing difficulties in uplifting the economic growth without the assistance from public debt. The process of estimation encounters the problems of heterogeneity and endogeneity which give inconsistent and biased estimates. The sustainable development goals (SDGs) by the United Nations outlined 17 goals that need to be achieved by 193 countries before 2030. The authors received no direct funding for this research. Nevertheless, the government should implement progressive tax system, in which the imposition of tax is only for individuals and firms who earned higher income. As a result, the country might not be able to remain competitive since investors would no longer interested to invest in the country. Lower economic growth that is caused by high public debt can also be explained through the overlapping generations model (Blanchard, 1985; Diamond, 1965; Modigliani, 1961), where the increase in the public debt will be partly used up national savings that were meant for the future generation. They represent the linear relationship in the forms of a positive, negative or insignificant linear relationship. By Reinhart and Rogoff ( 2015 ) claimed that the citizens of the indicates... This will make borrowing more expensive and reduce in investments service payment has a positive negative. Gregory Mankiw ( 1998 ) a sample of 20 advanced economies uses nonlinear threshold models to examine threshold! Types of documents in other languages prior to 2017 were excluded from this study not sufficient the! 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( 2015a ), least square dummy variable ( Butkus & Seputiene, 2018 ) and so on, countries.