Jeremy Smith — Shock research finding: high debt-to-GDP ratio leads to faster increase in GDP! (er..)

Our researchers (well, me actually), took the IMF data for annual UK public debt-to-GDP ratios available here. Then we took data on annual increases in GDP from the ONS database, available from here (see column BU) starting in 1949, and ending with 2011. Using our complex model (i.e. adding up) we found that for 18 years, from 1949 to 1966, debt to GDP ratios were above 90%. If one adds up the ONS annual increases and divides by the number of years, the average annual GDP increase over these 18 years when the ratio was over 90% is 3.19%.

We then looked at the periods when the debt-to-GDP ratio was between 60 and 90%. There are two periods totalling 9 years, from 1967 to 1972, and recently from 2009 to 2011. The average rate of GDP increase for these 9 years of 60 – 90% is 1.93%. 

Finally, we looked at the rest of the period in question, when the debt-to-GDP ratio was between 30 and 60%. This was from 1973 to 2008, covering 36 years. For this period of 30 – 60%, the average annual GDP increase is 2.60%....

It appears that the data and/or selection of data used by Reinhart and Rogoff are open to major question – and this set of conclusions are also now evidently wrong, for countries that have their own currencies and central banks....

The truth is that there is no level of debt which is in particular more risky or leads of itself to worse results.  It is always a matter of context, and of getting the right mix of policies.  But the (probably wrong) “findings” on public debt of Reinhart and Rogoff have been used as cover for contractionary policies of austerity which have ruined the lives of millions. For this they bear a heavy burden of responsibility. 

Prime
Shock research finding: high debt-to-GDP ratio leads to faster increase in GDP! (er..)
Jeremy Smith