Government debt: causes, effects and limits (2016)

The worldwide financial and economic crisis caused government debt to skyrocket. The German population, particularly sensitized by its experiences with two currency reforms, each of which followed a World War funded by government debt, was particularly spooked. Nevertheless, the ratio of general government debt to gross domestic product (GDP), or government debt-to GDP ratio, has risen since the mid-1970s not only in Germany, but in almost all OECD countries, after having initially fallen after the Second World War or remained at the same low level. German reunification drove the government debt-to-GDP ratio up from 40 percent in 1991 to 60 percent in 1997. The German government debt-to-GDP ratio rose by an additional 17 percentage points following the recent financial and economic crisis; this prompted the enshrinement of the debt brake in the German constitution in 2009. Yet this has failed to quell the public debate on government debt; it is being shaped by a confluence of fears, misjudgments and one-sided assertions. This report aims to clarify misconceptions held within the general public, fill knowledge gaps and shed light on what can be confusing discussion by presenting and explaining the existing evidence in economic, political and social sciences. Though confined to the determinants, the problems and the effects of government debt in the Federal Republic of Germany, this report does not ignore international influences, interdependencies and experiences.