Reducing public debt: When growth meets sound fiscal policy

By Álvaro Pina, Mauricio Hitschfeld and Takashi Miyahara, OECD.

Across the OECD, public debt reached 112% of GDP at the end of 2024, almost 40 percentage points higher than in 2007, before the global financial crisis (OECD, 2025). In the absence of offsetting fiscal policy adjustment, mounting spending pressures from ageing, defence and climate change will make debt ratios rise further. To help address these challenges, countries can draw on the lessons from past episodes of large and sustained reductions in debt-to-GDP.

In a recent paper (Pina, Hitschfeld and Miyahara, 2025), we have analysed 34 such episodes since the late 1970s, with 25 different OECD countries having experienced at least one episode. Favourable cyclical conditions have been the main driver of declining debt-to-GDP ratios, both through denominator effects and through their positive impact on budget balances. Discretionary fiscal consolidation efforts, mostly on the expenditure side, have been a more modest driver during debt reduction episodes, but have often helped to prepare the ground in the run-up to episodes. Overall expenditure restraint appears to have been accompanied by growth-friendly shifts in the composition of public spending.

Growth has helped to achieve and sustain primary surpluses

Debt reduction episodes are defined as ones that persist for a minimum of five years and bring down the gross debt-to-GDP ratio by at least 10 percentage points. All episodes start immediately after a debt ratio peak and end when the debt ratio bottoms out. The analysis considered 33 OECD advanced economies over 1976-2019, though data availability is limited for some countries.

Average GDP growth was 3.7% in years belonging to debt reduction episodes, against only 2.3% in the rest of the sample. Stronger economic growth has thus been a potent driver of debt-to-GDP ratio reduction by making the denominator grow faster, but also by enhancing tax revenues and reducing outlays on certain social transfers, such as unemployment benefits. In about 80% of the episodes the primary balance (excluding net debt interest payments) has improved relative to the year when the debt ratio peaks. Figure 1 decomposes this improvement into three parts, respectively due to:

• changes in cyclical conditions
• changes in budget one-offs (large and non-recurrent fiscal operations)
• deliberate fiscal policy action (measured by changes in the underlying primary balance – the primary balance adjusted for cyclical conditions and for one-offs – as a share of potential GDP)

Better cyclical conditions clearly outweigh the other two components, featuring in 29 of the 30 episodes shown and making the largest contribution to the primary balance improvement (1.4 percentage points on average).

In good times, policy has rebuilt fiscal buffers and reformed the composition of the public finances

The contribution from improved underlying primary balances has been more modest, at only 0.4% of potential GDP on average (Figure 1). Nonetheless, fiscal consolidation efforts have often prepared the ground in the run-up to debt reduction episodes. When comparing average underlying primary balances during episodes with those in the preceding years (up to five years instead of just the previous year as in Figure 1), the improvement reaches 1.8% of potential GDP.

Debt reduction episodes have also seen important changes in the composition of spending and revenue. Consolidation has been expenditure-based, but spending items generally regarded as growth-friendly, such as health, education or investment (Cournède et al., 2014; Fournier and Johansson, 2016), have been relatively spared (Figure 2, bars). This no longer holds for investment if consolidation efforts in run-up years are included (Figure 2, diamonds), but nonetheless investment cuts in episodes and their run-ups have been, on average, considerably smaller than in other consolidation years that failed to deliver sustained debt reduction. Other spending categories have been more heavily constrained, including pensions, with the upward trend observed in recent decades halted during debt reduction episodes. Total underlying primary revenues as a share of potential GDP have on average declined slightly, with a sizeable shift from labour taxation to corporate income taxes.

Figure 2. Fiscal consolidation in debt reduction episodes has been expenditure-based and changed public finance composition
Changes in ratios to potential GDP, percentage points, average across episodes

Note (hover to read the text)
Source: OECD Economic Outlook 98 database; OECD Economic Outlook 115 database; AMECO database, European Commission’s Directorate General for Economic and Financial Affairs; and authors’ calculations.

Future reductions in the debt-to-GDP ratio may be harder to achieve, as governments face multiple spending pressures and growth is now more subdued than in many earlier episodes. New circumstances call for new approaches to fiscal adjustment, where a larger contribution from revenue increases will likely be required. Nonetheless, governments can draw lessons from past episodes in which countries have achieved large and sustained reductions in their debt ratios and changed the composition of public expenditure. A key policy insight is that governments should take advantage of good times to rebuild fiscal buffers and bring down debt ratios. It has also been possible to make significant savings in particular spending items such as subsidies and certain transfers, including pensions. Such savings need to be accompanied by improvements to the overall targeting and design of spending programmes to maintain support for those who need it most.

References

Cournède, B., A. Goujard and Á. Pina (2014), “Reconciling Fiscal Consolidation with Growth and Equity”, OECD Journal: Economic Studies, vol. 2013/1, https://read.oecd.org/10.1787/eco_studies-2013-5jzb44vzbkhd

Fournier, J. and Å. Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”, OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris, https://doi.org/10.1787/f99f6b36-en

OECD (2025), OECD Economic Outlook, Volume 2025 Issue 1: Tackling Uncertainty, Reviving Growth, OECD Publishing, Paris, https://doi.org/10.1787/83363382-en

Pina, Á., M. Hitschfeld and T. Miyahara (2025), “Drivers of public debt reductions: Lessons from past episodes in OECD countries”, OECD Economics Department Working Papers, No. 1841, OECD Publishing, Paris, https://doi.org/10.1787/89a45c05-en