How Much Government Debt Is Now Acceptable for Russia?

Abstract

The period of near-zero interest rates is over, and the recent noticeable growth in the debt burden, as well as in the cost of interest payments to service that debt, has made it more challenging for national and global financial regulators to strike a balance between keeping budgetary parameters stable and spurring economic  development.  This  article  proposes  a  “safe”  threshold  for  the  debt  burden  such  that  the  ac-cumulated debt would not diminish prospects for growth and degrade fiscal sustainability. A significant negative linear effect of government debt on GDP growth rates from 1980 to 2021 has been observed for a total sample of 57 countries. According to the Hansen test, there are relatively safe thresholds for high- and middle-income countries at 56% and 24% of GDP, respectively. An assessment of the impact of government debt on the dynamics of interest expense indicates that there is a stable positive relationship between them. The conclusion drawn is that the thresholds beyond which an acceleration in the growth of interest payments would produce an increase in the debt burden stand at 51% and 29% of GDP, respectively, for the same groups of countries. However, the current conditions of unprecedented sanctions that restrict access to foreign borrowing together with a double-digit key interest rate were not taken into account for calculations based on the retrospective data. When those factors are included, the authors’ projections indicate that Russia’s safe level of debt should not exceed 20% of GDP.