Debt Ratio Theories - Causes of Debt - What determines it?

Theory 1 (PSNCR and the national debt) shows that the debt ratio depends quite significantly on the value of the PSNCR. This will tend to vary with the economic cycle. If the PSNCR is fluctuating around an average value of zero, then the government doesn't need to worry about it too much. Though the debt ratio may rise a little during recessions, it should decrease again when the economy recovers.

However, it will often be the case that the value that the PSNCR fluctuates around is far from zero. This means that the government is borrowing all the time. In other words, it is borrowing over the long term. Where this happens, this part of the PSNCR is termed a structural PSNCR. If there is a structural PSNCR then this will be continually adding to the national debt and increasing the debt ratio. In this situation the government has two main alternatives:

1. Increase taxes
2. Reduce government expenditure

If they it doesn't do either of these, the debt ratio may continue to rise.