2. Zero growth

As first let´s model a situation where economy is experiencing no growth, taxes are at rather standard level of 30% and planned state transfers are at 100% and are financed only through debt.

Businesses are generating profit depending from their margin and they are lending it all to state who is returning it back to economy through different transfers to supplement the additional missing buying power (BP). If state would not be realizing these transfers, there would be no profits for the businesses as buying power distributed through wages would be only good enough to provide sales at level of these wages and so sales = wages(costs) => profit =0.

With this variant it is obvious that state debt to GDP after 40 years will climb to unbelievably 480% GDP.
It is rather high number and it is given by the fact that in this variant the rate of transfers managed by state is 100%. That means that all companies will reach all their planned profits at 100%. In real economy it is not the case, some companies are successful and some are not. Unsuccessful companies are contributing with their costs (salaries of their employees and other costs) to sales of successful ones and so real participation of state is less than 100%. 

If all companies were to reach 100% of their planned profits at margin 10%, the state would have to budget with annual deficit of 6,4% (without any help of monetary policy).

Companies are fully reinvesting their profits to state bonds (for example total profit after 40years = debt total) and inflation is 0% (monetary of GDP = inflation, so no need for monetary easing)


Interesting questions are:
a) How does the tax rate influence the debt growth?

We can see that the higher the tax, the lower the growth of debt. So there is certain point in increasing the taxes to fight debt.

b) How does the profit margin influence the debt growth?

The higher profit margin, the higher the state debt necessary to complement the missing buying power. It is logical as higher margin means that companies will pay lower salaries and so there is less available buying power in circulation.

 As it is evident that by financing state transfers only through debt would very quickly lead to rather high debt (in 20 years to 200% of GDP), states have to use also monetary policy as well.

Let´s have a look how situation changes if some percentage of transfers
(Transfers – (Tax-Tax to repay debt)) is financed through monetary policy:

By comparison with the same variant (tax 30%, profit margin 10%, transfer 100%) is resulting debt after  40 years only 240% of GDP compare with 528% without use of monetary policy.

If all companies were to reach 100%of their planned profits,
the state with the use of monetary policy at the level of 3,2% GDP would have to budget with annual deficit of 3,2%.

c)       How does the ratio of monetary policy influence debt?

It is evident that pace of debt growth is much lower with use of monetary policy as supplementary method of financing of state transfers through debt.

Even that variant still assumes full transfer to optimal buying power, so as to all companies were to reach their plans at 100%, which does not happen often.

The real variant where governments would support only 50% of transfer would mean that companies would have to compete between themselves for customers and one halve is going to succeed and another is not, as there is only halve of needed additional buying power in circulation. So companies can reach aggregately maximum 50% of their planned profits and if some will achieve more it will be only at the expense of their less fortunate competitors.

In order to all companies were to reach on average 50% of their planned profits and to compete against each other effectively the state would have to incur annual debt of 1,7% HDP and use monetary policy at the size of  1,7%.

The state debt would reach after 20 years only 45% GDP, after 30y to 79% and after 40y to 126% GDP. This is quite real economical policy which is using debt and monetary policy as well. What still applies is that is not possible to stem debt growth as such, only to slow down its pace using correct combination of these tools.