The Great Dilemma of Public Debt Management: Repay, Grow, or Inflate? (Translated Title)

Italy and Hungary stand out in the European Union for the significant portions of their GDP dedicated to public debt repayment. Last year, Italy allocated 3.9% of its GDP to debt servicing, followed closely by Hungary at 3.8%. This expenditure highlights a key dilemma in public debt management: whether to repay, grow out of, or inflate away the debt.

The cost of servicing public debt is not solely determined by the total amount owed but also by the interest rates and risk premiums associated with each country. These factors cause considerable variation across the EU. The article notes that since the turn of the millennium, EU member states have financed an average of 1-14% of their budgets through borrowing, with a low point reached before the 2008 crisis and again at the end of the 2010s. In Hungary, mirroring the V4 average, borrowing has funded 5-18% of the budget over the past two and a half decades, with notable peaks in 2002 and 2006 due to funding welfare benefits around election periods.

In contrast to the EU's more modest reliance on borrowing, both the United States and China have financed nearly twice the proportion of their budgets through bond issuance since 2015. Despite this higher leverage, their economies have grown substantially faster. The U.S. has seen an average GDP growth rate of 2.5% over the last decade, while China's growth has been around 5.9% (though the reliability of China's figures is questioned, the scale is considered similar). The EU's average economic growth rate during the same period was only 1.7%.

This faster economic expansion allows the U.S. and China to "grow out of" their debt more effectively than European nations. Last year, EU member states, on average, covered 4.7% of their budget expenditures through borrowing. Hungary's borrowing ratio was significantly higher at 9.95%, placing it third among EU countries, behind Romania (18.2%) and Poland (14.3%). The article implies that while borrowing is a common tool, the ability to manage and outgrow the debt is crucial for economic health.