The fiscal costs of debt-financed government spending

Dahlby, Bev
Ferede, Ergete
Fuss, Jake
Faculty Advisor
debt-financed spending , government spending
Abstract (summary)
In this paper, we show that the notion that debt-financed spending has a low fiscal cost is misleading. We review econometric studies of OECD countries that show that the growth rate declines, interest rates increase, and the r - g differential increases as a country’s public debt ratio increases. We also estimate a simple regression model of the r – g gap in Canada based on the annual data from 1991 to 2019. Consistent with the findings of other more elaborate econometric studies, the regression results indicate that the r – g gap in Canada is affected by international financial and economic conditions, as reflected by the r – g gap in the United States, but also by the public debt to GDP ratio. In particular, a one percentage point increase in the debt to GDP ratio of the federal, provincial, territorial, and local government sector is associated with a 6.7 basis point increase in the Canadian r – g gap.
Publication Information
Dahlby, B., Ferede, E., and Fuss, J. (2022). The Fiscal Costs of Debt-Financed Government Spending. The Fraser Institute.
Item Type
Attribution-NonCommercial-ShareAlike (CC BY-NC-SA)