Public debt and the post-growth challenge: the case for a flexible monetary and fiscal policy framework

The transition to what has been called a ‘post-growth’ economy in advanced economies could lead to an uncomfortable policy choice between a fiscal contraction and a spiralling public debt-to-GDP ratio. This choice is particularly severe in the context of various long-term structural issues such as demographic change, geopolitical uncertainty and the costs of mitigating (or adapting to) climate change—all of which are expected to place significant pressure on the public finances. The aim of this paper is to address this challenge. We establish the underlying dynamics of the relationship between the growth rate, the interest rate on government debt and the public deficit, and articulate both conventional and alternative policy responses to this relationship. We illustrate how these policy responses impact differently on the public debt and estimate the magnitude of the fiscal or monetary policy response required to stabilise public debt-to-GDP ratios in different post growth scenarios. Ultimately, we show that debt stabilisation will be challenging whatever the level of economic growth, but that more ‘flexible’ approaches to monetary and fiscal policy will allow policymakers better opportunities to achieve their economic, social, and environmental objectives.