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A Balance-Sheet Approach to Fiscal Policy

Current fiscal-policy debates are based on flawed thinking about debt. It is time to stop focusing on nominal debt-to-GDP ratios, and instead promote a long-term balance-sheet-oriented approach to public spending.

WASHINGTON, DC – Everyone is talking about debt, citing huge nominal figures that strongly affect public-policy debates worldwide. But all debt is not created equal.

For starters, when it comes to public debt, there is a big difference between the gross and net figures. While Japan’s gross public debt, for example, is a massive 246% of GDP, the net figure, accounting for intra-government debts, is 127% of GDP.

Moreover, what should really matter about a country’s public-debt burden is the expected annual cost of servicing it. As Daniel Gros recently pointed out, debt that can be rolled over indefinitely at zero interest rates is no debt at all. This is an extreme example; but the closer a fixed interest rate gets to zero, and the longer the maturity becomes, the lower the burden of the stock of debt.

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