It’s rather an important question just at the moment. At what level of public debt, what portion of the entire nation’s annual output does the stock represent, does the whole system start to go kablooie?
We know that there is some level after all. Somewhere, at 70%, 150%, 400%, the interest we’ve got to pay forces taxes so high that half the country bunks off: at some point the national debt is so large that thre’s no captial left over for building anything productive. So what is that point?
The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth.
Ah, so borrowing past this point in order to fund fiscal stimulus and thus gain growth, even if we assume that the Keynesians are correct, is likely to become counter-productive. For the ball and chain of the debt defeats the balloon of the spending being pumped in.
Oh, hang on a minute! Aren’t we already scheduled to get to this sort of level of debt even after the Coalition stops increasing spending? (Yes, stops increasing spending, there are no cuts in the amount of cash being sprayed around.) Why, yes, I think we are.
You know, I think we might have shown that There Really Is No Alternative (TRINA for short).
And when we look at the longer term picture, what’s going to happen unless we reign in the public entitlements to other peoples’ money, debt ratios of 150%, 200% in only a couple of decades’ time, well, we really do need to start thinking about how we’re going to manage. We can’t whack up taxes because that will reduce growth, we can’t keep borrowing because that will reduce growth: TRINA again, we’re really going to have to cut the spending, aren’t we?