How to think about public debt?

The debate on whether or not public debt ratios in OECD countries are sustainable is vital . How to think about public debt in the current environment? 1. The portion of the public debt that is held by the central bank must be isolated. This public debt becomes a “zero-coupon perpetual” if the central bank decides to never reduce the size of its balance sheet in the future. 2. The effect of some public spending or public investment on potential growth must be examined, so as to correctly calculate the fiscal solvency condition by making long-term growth endogenous. 3. One must then examine whether the discounted sum of future primary fiscal surpluses is indeed higher than the public debt, excluding the portion held by the central bank. If long-term government bond interest rates are lower than the growth rate, this condition seems to be satisfied as long as there is a primary fiscal surplus. But because future primary fiscal surpluses are random, a risk premium has to be introduced into this calculation on top of the interest rate. It may be sufficiently high to make fiscal solvency difficult to obtain. 4. Finally, one must take the target level of the primary fiscal surplus, calculated as above to achieve fiscal solvency, and ask how this primary surplus can be obtained at the least cost to the economy (avoiding tax increases that negatively affect employment and potential growth, avoiding cuts to public spending that has a positive effect on long-term growth).