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Can the Czech Economy Grow Out of Debt?

The policy brief examines whether the Czech economy can “grow out of debt.” This notion is based on the premise that the ability to repay debt depends not so much on the absolute amount of debt, but rather on the debt-to-GDP ratio. This ratio can be reduced not only by cutting the debt itself, but also through stronger economic growth. However, the IDEA analysis concludes that the conditions for the Czech economy to grow out of debt are deteriorating and are likely to worsen further in the future.

Summary

In connection with the growing budget deficits of several EU countries, discussions – including in the Czech Republic – have introduced the idea that a state could “grow out of debt”. This notion is based on the premise that the ability to repay debt depends not so much on the absolute amount of debt, but rather on the debt-to-GDP ratio, which relates the size of the debt to the size of the economy (GDP). This ratio can be reduced not only by cutting the debt itself, but also through stronger economic growth. Stronger growth allows for greater budget deficits and further borrowing. A key condition is that the rate of economic growth must consistently exceed the interest rate at which the state can borrow. In this regard, arguments based on the idea of “growing out of debt” currently have very weak support in the Czech economic context, and this support is likely to weaken further in the foreseeable future.

Czech version of the study is available here