It is incorrect. To keep the proportional size of the national debt constant, you have to take into account not only the growth rate of the economy but also the size of the debt ratio, and the level of inflation. GDP is real (measured in "constant" prices), but the debt is in money terms. This means that if inflation is 10 per cent, a 10 per cent addition to nominal debt caused by running a deficit leaves the value at the end of the year unchanged.
McRae is right to argue that growth means you can have a stable debt to GDP ratio while running a deficit, but the twist is that the effect is in proportion to the debt ratio. So if you take the Maastricht requirement of a 60 per cent debt ratio, assume (as McRae does) 2 per cent long-run growth, then a steady debt ratio can be achieved with 3 per cent inflation and (coincidentally) a 3 per cent deficit.
The suggestion that "countries ought to be running substantial public sector surpluses" is rather bizarre (especially for the UK where we have next to no unfunded future pension liabilities). A public sector surplus means we are taxing the current generation to repay debt, so that our descendants will pay less tax, all things being equal. As economic growth will ensure that the next generation will be richer than us, it seems hard to justify this stance.
Professor Simon Price
London EC1Reuse content