The ability to increase the tax burden and public debt sustainability

The public debt ratio is sustainable if it stabilises at an acceptable level over the long term. If the public debt ratio stabilises at an excessive level over the long term, the primary fiscal deficit must be reduced (the primary fiscal surplus increased) for the public debt to converge towards a level that is not excessive. This shows that countries with a low tax burden, and therefore leeway to increase the ir tax burden, can have higher public debt ratios than countries with a high tax burden and therefore no leeway to increase their tax burden. The reason is that if the tax burden is low, the holders of the country’s public debt know that it can be increased in the event of difficulties in restoring public debt sustainability. This link between the public debt ratio and the ability to raise the tax burden may explain the situation in countries where the public debt ratio is very high, for example Japan and the United States.