Public Debt: Facilitator or barrier? A literature review of its impact on economic growth

Abstract

The sharp rise of public debt over the past years has renewed the debate about its impact on economic growth. This article provides a review of the main theoretical and empirical perspectives, highlighting the Keynesian, classical and threshold-based approaches. While Keynesian studies emphasize the potential of public debt to stimulate growth when used to finance productive investments during downturns, classical view warns against the risks of excessive borrowing, including crowding out and fiscal instability.  Threshold-based perspective, suggest a non-linear relationship, suggesting that debt supports growth at moderate levels but becomes harmful when certain limits are exceeded. 

Empirical evidence from advances, emerging and low-income economies, including recent findings from Africa, the MENA region and Europe, shows that the impact of public debt on economic growth varies considerably, depending on internal and external factors such as institutional quality, fiscal policy frameworks and macroeconomic conditions. The often cited 90% debt-to-GDP ratio found by Reinhart and Rogoff, illustrates the importance of identifying critical levels at which debt starts impacting negatively growth. However, as the reviewed studies reveal, such thresholds are not universal and unique, their effects vary between countries, and depend on many factors. The findings suggest that public debt can support economic growth when managed prudently and used to finance productive investments, but can be harmful when mismanaged or accumulated.

Classification JEL: H63

Paper type: Theoretical Research