Public Debt, Fiscal Sustainability and Economic Growth: An Empirical and Theoretical Reassessment

Abstract

This paper examines the triangular relationship between public debt accumulation, fiscal sustainability, and long-run economic growth. Using a synthesis of theoretical models and stylised cross-country evidence for the period 2000-2025, the study investigates whether rising public indebtedness undermines growth performance and under what conditions debt trajectories remain sustainable. The analysis draws on the debt-dynamics identity, the interest-growth differential (r-g) framework, and the fiscal reaction function literature to characterise the channels through which debt affects output. Descriptive statistics and illustrative visualisations reveal a non-linear, hump-shaped association between debt and growth, with a turning point around 55-70 percent of GDP beyond which the marginal growth effect of additional borrowing becomes negative for a representative sample of economies. The paper further shows that fiscal sustainability gaps differ systematically across advanced, emerging, and low-income country groups, reflecting differences in borrowing costs, growth potential, and institutional capacity for fiscal adjustment. The findings support a state-contingent view of fiscal policy: debt is not intrinsically harmful, but its growth effects depend on the composition of expenditure, the credibility of the fiscal framework, and the debt-service burden relative to potential growth. Policy implications for debt management, fiscal rules, and growth-friendly consolidation are discussed.