The Impact Of Public Debt On The Sustainability Of The Economy

Did increased public debt jeopardize the sustainability of the economy, taking all dimensions into account? Research to date has focused on the role of gross public debt in financial sustainability. Two opposing views on sustainability of the economy have emerged: strong sustainability, requiring separate preservation of all environmental assets, and weak sustainability, allowing a high degree of substitutability among produced capital, human capital, and natural capital. Our study focuses on weak sustainability. Although debt build-up can finance capital expenditure, debt servicing can increase pressure on natural resources that are essential for a sustainable economy, affecting all components of adjusted net saving or the inclusive wealth index, both of which measure economic sustainability. We gathered data on gross debt as a percentage of gross domestic product for 80 low-income countries over the period 1990–2017. Using the Arellano and Bond (1991) estimator, we found that an increase in public debt translated to a higher adjusted net saving rate. Debt scaling-up in low-income countries from 2010 was thus associated with progress towards sustainability. However, although debt sustainability appeared to be associated with sustainability of an economy, the public debt coefficient was negative when using inclusive wealth growth to measure progress. Our study is the first attempt to assess the impact of gross public debt on economic sustainability, taking all dimensions into account. It contributes to ongoing efforts by the World Bank and the International Monetary Fund to improve the debt sustainability framework for low-income countries and help them move towards more sustainable economies. Our findings are particularly relevant for the Sustainable Development Goals (Goal 12: Ensure sustainable consumption and production patterns) in the context of post-covid-19 recovery.