Essays on Fiscal Policy and Public Debt Sustainability

Student thesis: Phd


This thesis studies two topics of fiscal policies and public debt sustainability. In Chapter 2, the study is motivated by the fact that UK government debt relative to output has increased dramatically in the last decade. In addition, an aging population in recent years presents many challenges to government expenditures. Consequently, the UK is projected to experience further upward pressures on government debt. This chapter uses a Neoclassical Growth Model to explore the amount of additional tax revenues needed to finance the future government expenditures and at the same time reduce the debt to output ratio to 60%. We find that the required revenue to achieve fiscal stability is in the range of 20-24% of consumption expenditures. Also, when a distorting tax (consumption tax or labor income tax) is used to achieve the goal, such tax rate needs to increase to a very high level, even though the government has broadened its tax base. Chapter 3 aims to identify the public investment shock for a sample of 14 OECD countries from 1985 to 2018 and investigate how public debt sustainability affects the macroeconomic effect of a public investment shock. This study identifies public investment shock as forecast errors of public investment and uses the local projection method to estimate the responses of a set of key macroeconomic variables to public investment shocks. The empirical result shows that the public investment shocks can increase the output, with a multiplier of 2.3 on average over three years. Moreover, public debt sustainability affects the effectiveness of the public investment: The responses of output are statistical significant larger in a weak-debt regime (i.e., the debt-to-GDP ratio is greater than a specific high level) than in a strong-debt regime (i.e., the debt ratio is less than a specific low level). To investigate the channels through which public debt sustainability can affect the effectiveness of public investment shocks, we also consider the response of other macroeconomic variables and find that public debt sustainability can limit the effectiveness of public investment through private consumption and borrowing costs.
Date of Award1 Aug 2022
Original languageEnglish
Awarding Institution
  • The University of Manchester
SupervisorXiaobing Wang (Supervisor) & Raffaele Rossi (Supervisor)

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