## 6. Lowering of debt

So we have quite good understanding how the debt is created and which factors are influencing its pace of growth.

Let´s have a scenario, where we already have a debt after 40 years with using different factors increased(lowered) by 10%:

Original value: 79% debt to GDP at(productivity 3%, salaries growth 3%, profit margin 10%, savings 1%, transfer rate 50%, tax 30%,monetary 50%, interest rate 3%

In previous scenarios we painted different outcome of debt growth based on different conditions and economy policies.

**The most influential factor of debt growth is higher growth of productivity then wages. If wages are growing slower then productivity of work there is the strongest pressure to debt growth. It is quite natural and fully supports our theory as with this approach there is growing portion of profit on GDP and profits have to be financed through debt or monetary policy.**

**This is in direct contradiction with current managerial practices of the last 30-40 years where it was always stressed that it is important that productivity should grow faster than wages.**

So if we want to lower already existent debt, we should use the same factors that caused it, but in reverse way:

- Increase wages at the expense of productivity or at least level their pace of growth with productivity
- Increase pace of monetary policy (pay more debt with new money)
- Decrease total level of transfers (but this will be at the expense of profits)
- Lower the profit margin( increasing the status of unions in order to achieve higher growth of wages against profits and so lower the margin, increasing the competition)
- Lower the interest rate
- Increase the taxes
- Decrease the rate of savings

All these steps will result in decrease of debt to GDP but with different magnitude.

a) At first let´s have the most simple case of debt that reached only 10% and let´s try to reduce it through repayments as certain percentage of collected taxes:

If the debt would not be repaid at all (repay rate = 0), it would continue to grow and after further 40 years would reach 75%.

By increasing the repay rate to 50%, what means that 50% (!) of all collected taxes would serve debt repayment, the result would be:

We can see partial decrease of debt growth (against doing nothing) but it is still growing (61% > 10) so there is no real decrease of debt levels.

Not even by absolute unreal variant of 100%, that is if all taxes went towards debt there would be no progress:

**Just with repayments from taxes with keeping the profit creation possibility through transfers there is no way to lower the debt. We can achieve only modest decrease of its growth.**

b) Let´s try the receipt of increasing wages above productivity.

With wages growth faster than productivity there is indeed after 20 years decrease of debt from 10% to 8%, but at the cost of fall in profits. Profits turned to losses, what could be expected. So not very good for practical policy.

We would reach the similar result with addition of certain repayment % from taxes:

The debt will go down only during lowering the profits to losses.

c) If we use more monetary policy

**If we wanted to lower the debt just by 1% after 10 years, with different levels of repayments from taxes ranging from 1% to rather drastic 20% would need to increase the level of monetary policy to 93-100%, which represents some 3,4% GDP. **

The same applies with different level of debt and repayment levels.

If we want to lower the debt even faster, we would need more monetary adjustment, say 120%.

With 4,1% monetary policy per year we will gain debt decrease by 6% in 10 years.

**So if we are serious about lowering the debt, without hindering the profit creation it would cost us at least 4% monetary policy and debt repayments at the level of 5% from taxes.**

What is important is that if we wanted to decrease the debt only through higher taxes (without monetary policy) even with marginal parameters of tax = 80% and level of repayments=20% from taxes we would not succeed.

**Only increasing the taxation, without complementary monetary policy will not yield any debt decreases.**

**This is extremely important piece of knowledge as it totally negates the policy of austerity which is trying to reduce the debt through belt tightening. **