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Public Debt and Economic Growth: What the Evidence Says
High and rising public debt is consistently associated with slower economic growth
| This Policy Spotlight distills the core findings and recommendations from the Policy Brief on this topic. For the complete analysis and data, please see the full paper here. |
A review of 70 empirical studies (2010–2025) reaffirms a critical economic insight: As US public debt exceeds 100% of GDP, the mounting burden carries real and measurable consequences for investment, interest rates, inflation risk, and long-term living standards.[1]
Key Takeaways for Policymakers
1. High Debt Slows Growth
The central estimate across studies suggests that each 1-point increase in the debt-to-GDP ratio reduces economic growth by 1.34 basis points.
With US debt now over 100% of GDP—well above prepandemic levels—economic growth in 2025 is estimated to be about 0.27 percentage points lower than it would have been without the recent debt buildup.
2. There’s a Threshold—and We’ve Crossed It
Of 48 studies that searched for a “tipping point,” 42 found a nonlinear threshold: Debt can stimulate growth when the debt is low but hinder growth when the debt becomes excessive.
For advanced economies, the mean threshold is 75–80% of GDP. The US crossed that line in 2020 and has not looked back.
3. Why It Matters: The Crowding-Out Effect
Rising government borrowing competes with private investment, pushing up interest rates. This reduces private capital formation, productivity, and wage growth.
The Congressional Budget Office estimates that every dollar of additional deficit spending crowds out 33 cents of private investment.
4. Inflation and Market Risk
Investors demand higher yields when they fear debt monetization and future inflation. This inflates borrowing costs and deters long-term investment.
Persistent inflation risks also erode confidence in US fiscal and monetary credibility, raise debt costs, and put further pressure on future budgets.
Why Growth Drag Is a Big Deal
Even a modest slowdown of 0.25–0.50 percentage points per year compounds significantly over time.
An economy growing at 3% doubles every 23 years.
At 2%, it takes 35 years.
The difference represents a lost decade of progress, with real consequences for American families, jobs, and opportunity.
Policy Implications: Rethink the Deficit Default
- Deficits are not free. The evidence shows they come with long-term costs.
Borrowing should be strategic, not routine. Debt-financed stimulus may be justified in recessions, but not as a permanent fixture of economic policy.
Bottom Line
Debt isn’t destiny, but it does matter. The time for prudent fiscal planning is now. Keeping public debt below 80% of GDP should be treated as a policy goal, not a relic of the past.
Notes
[1] See Jack Salmon, “The Impact of Public Debt on Economic Growth: What the Empirical Literature Tells Us” (Mercatus Policy Brief, Mercatus Center at George Mason University, August 2025).
