Government debt and the value of government

Abstract

This paper establishes a conceptual framework within which questions about both government value and the optimal or prudential public debt can in principle be addressed. Although derived by analogy with private sector corporate finance, the model recognises the public good character of many government projects as a source of economic value added, which in turn becomes part of society's equity and available to underpin debt financing. A sustainability condition is that the net burden of debt, measured as the ratio of net interest costs to GDP, should not exceed a certain fraction of the economic surplus or social profit created by government plus the non‐interest part of the government budget surplus. The existence of a public good user surplus, as well as intergenerational factors, supports a more relaxed attitude towards public debt.

Notes

Department of Finance, University of Waikato.