The growth of fiscal deficits and the resulting increase in government debt have attracted the attention of policymakers and financial market analysts. However, the impact of these factors on economic variables remains controversial among economists, with some who blame fiscal imbalances for a number of economic weaknesses, while others consider these factors as largely irrelevant. Empirical tests of the competing hypotheses tend to be inconclusive. In particular, tests of the relation between fiscal variables and real interest rate are problematic in part because of lack of data for a period long enough to test the relation and because they have been conducted on a country-by-country basis in a world where capital markets have become global. This paper presents comparable fiscal data for each of 18 industrial countries for the period 1970-94 and for two groups of countries combined, the G-7 and the 18 industrial countries. These data provide a useful basis for discussing fiscal trends and for allowing econometric tests.
The first two sections discuss fiscal developments over the 1970-94 period looking at four alternative fiscal balance measures: the conventional balance, the structural or cyclically adjusted balance, the inflation adjusted balance, and the primary balance. No country seems to have escaped the trend toward fiscal deterioration even though some countries have experienced far more deterioration than others. The deficits of the various countries were aggregated to show what happened to the groups, the G-7 and the 18 countries combined.
The third section relates the growth in fiscal deficits to trends in private saving. Higher fiscal deficits have been accompanied by declining private saving, leaving a decreasing portion of saving available for financing private investment.
The fourth section focuses on the fast growth of public debt since 1980 and briefly reviews its possible economic consequences. Finally, the fifth section provides evidence in support of a link between public debt and real interest rate. On the basis of a finite horizon overlapping generation model--which is formally developed in Appendix I--an econometric exercise is performed suggesting that the increase in the debt-to-GDP ratio, which took place over the period 1980-93, would have increased real interest rates by more than 1.5 percentage points. The panel data which have been used in the estimation constitute a larger sample than the ones used by earlier studies.