About this work
Low borrowing costs improve fiscal sustainability, but do not make deficits unlimited. Jonathan Fortun and Sergi Lanau examine the limits of that argument in February 2021: interest rates below economic growth help debt dynamics, yet sufficiently large deficits can overwhelm the benefit. Their assessment suggests that low rates could make primary deficits of 3 to 4 percent of GDP feasible in developed economies, rather than removing the need to assess fiscal constraints.
Abstract
Low borrowing costs improve fiscal sustainability, but do not make deficits unlimited. Jonathan Fortun and Sergi Lanau examine the limits of that argument in February 2021: interest rates below economic growth help debt dynamics, yet sufficiently large deficits can overwhelm the benefit. Their assessment suggests that low rates could make primary deficits of 3 to 4 percent of GDP feasible in developed economies, rather than removing the need to assess fiscal constraints.
Cite this work
Jonathan Fortun, Sergi Lanau (2021). Economic Views: Low Rates and Deficit Sustainability. Institute of International Finance.