06 May 2022

The growing public debt and the associated risks

A seminar titled The growing public debt and the associated risks launched the series of seminars organized by mBank and CASE in 2022.


Watch the recording of the Seminar (in Polish):


Watch the recording



Professor Marek Dąbrowski began his presentation by pointing out that the sharp growth in governments’ debt in 2020 in response to the coronavirus pandemic isn’t the first such case in the 21st century. Earlier crises, i.e. the 2007-2009 global financial crisis, and the European financial crisis of 2010-2015, caused sharp growth in public debt. Unfortunately most of the countries affected by these crises didn’t use the later years (2015-2019) to repair their public finance. As a result, after the COVID-19 pandemic broke out, as many as 12 developed countries had public debt of more than 100% of GDP in 2020.

Professor Dąbrowski explained that changes in debt may be explained by three factors, specifically (1) changes in the primary public sector deficit (which is determined by current fiscal policy); (2) changes in the difference between real interest rates and the real economic growth rate and (3) changes in exchange rates (a factor that’s important for countries that borrow in foreign currencies). Today a discussion is ongoing about how real interest rates on government borrowing will differ from real economic growth rates. In 2019 Olivier Blanchard published an article presenting the thesis that in practice, what matters is the size of interest payments on public debt, and they remain low despite the high level of debt, as interest rates are low. This point of view was taken up both in academia and by policymakers. Thus, the main question is whether this thesis is true, and whether it will remain true in the future.

Professor Dąbrowski presented his position. He noted that the drop in real interest rates won’t necessarily last, in light of the rather pessimistic prospects for growth rates in developed economies. In addition, there is the extra burden on fiscal policy, which won’t make current fiscal adjustment easier, even if for various reasons particular countries will make such attempts. In the short term, of course, this is spending related to the fight against the pandemic, which causes additional burdens in the healthcare sector. Meanwhile, in the medium and long term this is spending related to the aging of societies and green transformation. Professor Dąbrowski concluded his presentation with the following recommendations: the direction of fiscal policy must be changed as quickly as possible, which means fiscal adjustment must begin; countries must also return to applying fiscal rules.

The second speaker was Professor Andrzej Rzońca, who devoted his presentation to Poland’s public debt. Poland’s debt is very far from the level at which developed countries may have problems with debt servicing; additionally, in terms of ability to service debt, our economy has joined the ranks of highly developed countries. Today the ratio of net interest costs to public revenue in Poland is even a bit lower than the European average. Professor Rzońca stressed that this doesn’t mean that public debt isn’t a problem in Poland. The direct source of debt, i.e. the fiscal deficit, harms economic growth and public welfare. The deficit means higher taxes in the future and income inequalities. The deficit means a worsening structure of public spending. The deficit is also a textbook mechanism for “crowding out” investment in the real sector by government spending, increased competition for private savings, higher credit risk and deeper uncertainty, which has negative consequences for a country’s relationship with its environment.

Professor Rzońca brought up the issue of the public debt trap, i.e. a situation where debt reaches a level at which it’s very difficult to rein it in. Economic growth in conditions of the public debt trap is slow, and the determinants of growth take an unfavorable form, and without greatly changing them the chances for accelerated growth are negligible. Professor Rzońca stressed that the negative effects of delayed adjustment of public spending to slowed growth have been felt by many highly developed countries. The debt trap is easy to fall into because with slowing growth, even a deficit that isn’t increasing causes debt to stabilize at a high level.

Professor Rzońca stressed that for Poland not to fall into the debt trap, it is necessary to strengthen the growth of the Polish economy. In particular, it is necessary to increase the effective retirement age, support private investment in the real sector and create incentives for company growth. Additionally, fiscal rules must be strengthened, in particular by bringing the domestic concept of public debt into line with the EUROSTAT concept and applying the spending rule to the entire sector of central and local government institutions.