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Managing government debt, taxes and public investment

Author

Listed:
  • Peng, Juan
  • Tang, Zian
  • Yang, Jinqiang
  • Zhang, Zhanhao

Abstract

In this paper, we construct a dynamic model to study government debt and fiscal policy, where we refine the government spending component by separately considering government investment. We find that incorporating government investment increases both the household’s value and the government’s sustainable debt capacity. However, due to the additional funding requirements brought about by government investment, the marginal cost of servicing debt and the optimal tax rate both increase. Finally, we find that the optimal ratio of government investment to capital decreases as the debt level rises.

Suggested Citation

  • Peng, Juan & Tang, Zian & Yang, Jinqiang & Zhang, Zhanhao, 2025. "Managing government debt, taxes and public investment," Economics Letters, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:ecolet:v:247:y:2025:i:c:s0165176525000291
    DOI: 10.1016/j.econlet.2025.112192
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    More about this item

    Keywords

    Sovereign debt; Default; Limited commitment; Investment; Debt sustainability;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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