The importance of the sensitivity of potential growth to public spending

We will show that when analysing a country’s fiscal solvency (debt sustainability), the sensitivity of potential growth to public spending is a key parameter. To see this, we must distinguish between the case where the interest rate is lower than the growth rate (the response of potential growth to public spending then determines the level at which the public debt ratio will stabilise) and the case where the interest rate is higher than the growth rate (the response of potential growth to public spending is then key to determining whether or not the public debt ratio diverges). A detailed analysis of the effect of different types of public spending on long-term growth is therefore essential if we are to seriously analyse different countries' fiscal solvency.