I've always heard that it's good for countries to have debt to spark growth, but at what point does a national debt become so big that it becomes a problem?
1I think your question is opinion based, because different people would answer it differently.– Ekadh Singh - Reinstate MonicaOct 10, 2021 at 2:26
4While the question may be prone to opinion, I think it is nevertheless fit for the site as there are many researchers who have investigated that question and published their results. The results of individuals might disagree but not always do political sciences have a clear answer.– JanOct 13, 2021 at 11:14
@EkadhSingh-ReinstateMonica That's not a valid reason to close a question. An opinion based question is not the one that might attract diverged set of answers from different people. The opinion based questions are the ones that any attempt to answer them would strongly depend on personal views or preferences.– Mithridates the GreatOct 26, 2021 at 19:34
@MithridatestheGreat any attempt to answer this question would strongly depend on personal views.– Ekadh Singh - Reinstate MonicaOct 26, 2021 at 20:08
@EkadhSingh-ReinstateMonica Certainly, no. This question could be answered by an economist. There are quantitative tools to identify if national debt of a country is too much based on GDP, population, etc. So, no it's not opinion based.– Mithridates the GreatOct 26, 2021 at 21:39
Uncontroversially: when you stop being able to raise new debt.
More debatable: somewhere on the path to the above point, when e.g. your borrowing costs raise substantially be they in absolute terms (amount of interest as fraction of GDP or government revenues) or in relative terms, e.g. a sharp increase in bond yields. Due to various constraints on the central bank, even the latter can result in more inflation, possibly affecting the economy as a whole.
As one Wold Bank paper phrases the latter issue:
The most basic cost of public debt is the servicing cost—the interest to be paid to creditors—which may be compared with the rate of return on the spending financed by debt to provide the simplest guide to whether public borrowing is worthwhile. An important argument against heavy borrowing, which may outweigh the benefits of borrowing in some countries, is that rollover costs—the costs of refinancing when debt matures—can increase sharply during periods of financial stress and even trigger a financial crisis. High debt can also limit the feasible size and effectiveness of fiscal stimulus during downturns. Finally, high debt can constrain growth over the long term by crowding out productivity-enhancing private investment.
The amount of net interest is presently not a real issue in the US, but it's (future) projected figures under the present tax and spending constraints are what drives the latter discussion:
The standard textbook account of Reaganomics is that its tax cuts failed to trigger enough "trickle down" economic growth and associated government revenue growth so debt grew during that era. However, the outlays on interst only reached something like 3% of GDP even during that era. The combination of (pre-Covid) Trump tax cuts and Covid stimulus may put the US outside of the charted historical parameters, under current projections.
For countries other than the USA, the discussion is more complicated because a lot of the debt may be in a foreign currency that they have no control over.
The effect of debt on inflation (via yeilds) is disccussed in more detail in a Fed paper, but the conclusion there is non-commital in quantitative terms:
there is no way of knowing beforehand just how large the national debt can get before inflation becomes a concern.
Likewise an S&P article describes debt as potential "kryptonite" for inflation, but says no effects have been observed in the US so far. Some experts speculate that any post-Covid inflation will be a temporary spurt (as in the Fed paper above) while others (cited in the S&P article) are more gloomy, suggesting that the US may experience something like Japan's decade of lost growth if debt is not addressed forcefully.
1Interaction between inflation and debt with respect to WWII debt was the subject of a previous question politics.stackexchange.com/questions/52946/…– FizzOct 10, 2021 at 7:47
1More discussion here brookings.edu/opinions/five-myths-about-federal-debt including whether analogy with the period after WWII is reasonable.– FizzOct 10, 2021 at 11:07