The Historical Importance of Growth and Inflation in Reducing High UK Public Debt Ratios

This paper employs an extended accounting framework to estimate the role of real GDP growth and inflation in reducing the UK public debt to GDP ratio following the Napoleonic Wars and the two World Wars. Traditional debt accounting methods do not quantify the impact of growth on the budget balance and therefore underestimate the importance of growth. The extended accounting framework captures the impact of growth on the budget balance. Applying the extended approach to the UK shows that growth matters more than previously acknowledged in reducing the historical public debt ratio, especially following the Second World War. Inflation following the Second World War had a sizable but lesser impact on the debt ratio compared to real growth.