A new economics paper by the International Monetary Fund has criticised influential research which has been used by Chancellor George Osborne and other politicians to justify austerity politics.
The IMF research entitled, Debt and Growth: Is There a Magic Threshold? criticises conclusions made by economists Carmen Reinhart and Kenneth Rogoff, which states a high level of public debt causes an economy to stagnate.
Previous research, in particular the influential 2010 paper Growth in a Time of Debt by Reinhart and Rogoff, found that "when external debt reaches 60% of GDP, annual growth declines by about 2%; for higher levels, growth rates are roughly cut in half."
The new research released by IMF researchers Andrea Pescatori, Damiano Sandri and John Simon states that they find no evidence that there is any particular debt threshold above which medium-term growth prospects are dramatically compromised.
"We find no evidence of threshold effects over any but the shortest-term horizons....the remaining relationship between debt and growth is relatively muted and the magnitude is much smaller than the dramatic figures suggested in earlier studies," said the paper.
The findings of the paper suggest that countries with debt ratios as high as 130%-140% have experienced solid growth.
The authors conclude that there is no simple threshold for debt ratios and that "the association between debt and growth at high levels of debt becomes rather weak when one focuses on any but the shortest-term relationship, especially when controlling for the average growth performance of country peers".
"Furthermore, we find evidence that the relation between the level of debt and growth is importantly influenced by the trajectory of debt: countries with high but declining levels of debt have historically grown just as fast as their peers," said the report.