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How is public debt related to economic growth and unemployment?

In this project different economic factors will be compared with each other to see if any correlations exist between them. These will perhaps explain certain trends and changes we see. The three factors focused on in this report are GDP growth, Government Debt and Budget surplus/deficit. In the data provided there is a very large standard deviation for GDP (see appendix). In both 2009 and 2010 the standard deviation was over four and a half times larger than the average of GDP itself. This will make it hard to create general assumptions for all countries to assess whether different factors correlate with each other. Even other factors such as GDP growth have relatively large standard deviations. This may cause difficulties in examining factors. An example of ambiguous data can be seen when comparing Canada and India. They both had fairly similar GDP and debt figures in 2010 but India’s GDP growth was around three times that of Canada’s. This shows that we cannot make hard-and-fast rules on links between different factors but we may be able to make general connections and assumptions. Distribution of GDP Growth and Government Debt within countries Figure 1:

GDP Growth (2009-2010)
60 50 Number of Countries 40 30 20 10 0 Frequency GDP Growth 2009-2010 (% change)

As we can see from Figure 1 distribution of GDP growth is relatively small, with 93.4% (171/183) countries having a growth between 0% and 10%. If we then look at Figure 2 we see that Government Debt is much more spread out compared to GDP growth. This shows that very few countries are able to achieve very high economic growth and few produce negative growth, but the majority of countries have a steady rate of GDP increase.

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Figure 2:

Government Debt (2010)
14 12 10 Frequency 8 6 4 2 0 0 10 20 30 40 50 60 70 80 90 100 More Frequency Govt Debt (% of GDP)

The spread of Government debts however is much wider. Whereas growth is relatively easy to influence, debt can be seen as a by-product of attempting to create growth for the economy. Some countries may achieve growth more efficiently than others. There may be factors such as corruption, location, difference in sizes of public sectors, and may other determinants that may affect the level of debt. Comparing GDP growth directly with Debt and Budget/Surplus Figure 3:

30.00 GDP Growth (% change 2009-2010) 25.00 20.00 15.00 10.00 5.00 0.00 -5.00 0 20

GDP Growth and Govt Debt

GDP Growth Poly. (GDP Growth)

40

60

80

100

120

140

-10.00 -15.00 y= -3E-10x6 Government Debt as of 2010 (% of GDP) + 1E-07x5 - 2E-05x4 + 0.0015x3 - 0.0594x2 + 1.0257x - 0.5414 R² = 0.1611

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Figure 4:

GDP Growth and Budget Surplus/Deficit
30.00 20.00 GDP Growth (% change 2009-2010) 10.00 0.00 -40 -30 -20 -10 -10.00 -20.00 -30.00 Budget Surplus/Deficit as of 2010 (% of GDP) y= 9E-07x6 + 3E-05x5 - 0.0003x4 - 0.0129x3 + 0.001x2 + 1.0549x + 6.42 R² = 0.4706 0 10 20 30 GDP Growth Poly. (GDP Growth)

If we look at Figure 3 and Figure 4 there are no major correlations to be seen in either of them. The data which has been used to formulate the scatter graphs do not show any relating trends to one another. In Figure 3, as Government debt increases there is no obvious trend for GDP Growth. However the trend line has a slightly downwards slope. So it could be said that there is a slight decrease in growth as debt increases, shown by the fact that the higher values of debt achieving lower or negative growth. This allows us to infer that as public debt increases the level of growth decreases. This could be due to lack of Government spending or investment and various other reasons. Figure 4 has a similar lack any distinguishing trends. It does, however, show a slight upwards trend. The lowest value of -30% (deficit) achieves a negative GDP growth. Then if we compare this with the highest value at +20% (surplus) we see a significant increase in GDP growth at roughly +27% (also the highest value). In general we tend to think having a budget deficit acts as a boost to the economy through higher spending by the Government, but this trend shows otherwise. It suggests that an increase in spending (and eventually higher debt) will lead to lower economic growth. However it can be reversed and said that slow economic growth is the limiting factor and that that may determine changes in Government debt. Perhaps countries with a budget surplus are indicative of a Government which receives higher tax revenues which could be closely linked to higher economic growth, especially if people’s incomes are increasing (hence higher tax revenues). Deficits may also be seen as lower tax revenues rather than an increase in Government spending. If a Government receives low taxes then it cannot spend either. This will lead to slower economic growth which perhaps explains the trend we see in Figure 4.

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Figure 5:

Unemployment and Debt Growth (US)
35.00 30.00 25.00 Pergcentage Change 20.00 15.00 10.00 5.00 0.00 -5.00 -10.00 -15.00 In Figure 5 a trend can be seen more easily in comparison to Figures 4 & 5. The graph shows a minor positive correlation between unemployment and debt growth. At points in the graph it is more noticeable. For example, from 1991 to 2000 there is a sharp drop in debt growth and what seems to be a following decrease in unemployment during the same period. After which they both begin increasing. Almost all parts of the graph show a positive correlation. This strongly suggests there is a link between changes in public debt and unemployment levels. The reasons for changes in debt growth were discussed earlier, such as slowed economic growth, lower tax revenues or changes in Government spending. Whichever the cause, there does seem to be a direct link between unemployment and debt growth. Perhaps increases in unemployment causes higher public debt. This may be due to a combination of lower tax revenues and increased welfare pay-outs. Or maybe it could be that changes in public debt causes changes in unemployment. It could be argued that if the Government is spending and investing less in the economy that there will be fewer jobs created. It may also depend on the size of the public sector of a certain country. Figure 5 shows data for the US which has a very small public sector in comparison to countries such as the UK. This could indicate that unemployment is the leading factor in affecting public debt and not the other way around. In conclusion, the way that public debt relates to economic growth and unemployment ultimately depends on the country being investigated. It can however, after looking at the figures be said that a decrease economic (GDP) growth will lead to an increase in Government debt. This can be verified by Figure 3 showing when growth slows debt public debt increases, and by Figure 4 showing that lower levels of growth causes more spending (deficits). As for unemployment and public debt, the relationship between them strongly depends on the country as mentioned before. A country with a larger sized public sector will be affected in terms of debt more so than one with a small public sector. However, it does seem that unemployment is the determining factor in terms of affecting debt growth. 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Unemployment Debt Growth

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APPENDIX
Descriptive Statistics:

GDP 2010
(millions constant 2000 US$)

GDP 2009
(millions constant 2000 US$)

Budget Surplus/Deficit
(as % of GDP 2010)

Govt. Debt
(as % of GDP 2010)

GDP Growth
(2009-2010)

Mean

288366.5 14141.0 1334812.4 12424738.8 16.6

277335.5 13579.7 1291701.9 12058900.0 17.4

-3.1 -3.3 5.7 19.4 -31.3

52.4 48.2 27.9 131.5 6.4

4.2 3.9 4.0 27.0 -8.9

Median

Standard Deviation

Maximum

Minimum