The main difference for fiscal policy when the interest rate is lower than the growth rate

In the OECD and worldwide, long-term government bond interest rates are currently lower than nominal growth. It is important to understand what this means for fiscal policy: When the long-term interest rate is higher than nominal growth, the public debt ratio dynamics is unstable: if the primary fiscal surplus (excluding interest on the debt) is lower than a certain threshold, the public debt ratio increases without limit; if it is higher than this threshold, the public debt ratio decreases without limit; When the long-term interest rate is lower than nominal growth, the public debt ratio dynamics is stable: whatever the primary fiscal surplus or deficit (excluding interest on the public debt), the public debt ratio converges towards a limit value. In the first case (above-growth long-term interest rate), governments must maintain a primary fiscal surplus that is high enough to stop the public debt ratio from diverging. In the second case (below-growth long-term interest rate), governments must set a limit for the public debt ratio that they do not want to exceed in the long term. This limit defines a maximum primary fiscal def icit.