What we can learn from public debt reductions in OECD countries

Public debt-to-GDP ratios have risen substantially over the past 25 years, and multiple spending pressures threaten to increase them further. This column outlines the lessons learned from episodes of successful debt reduction in OECD countries since the late 1970s. Sustained primary budget surpluses have been a key driver of declining debt ratios, reflecting favourable cyclical conditions coupled with consolidation efforts that have changed the composition of the public finances. Expenditure restraint has curbed subsidies and moderated the upward trend in pension outlays, while largely sparing healthcare and education. Corporate, but not personal, income tax revenues have strongly increased.

Across the OECD, general government gross financial liabilities reached 111% of GDP at the end of 2024, almost 40 percentage points higher than in 2007, before the global crisis (OECD 2025). Faced with additional pressures from ageing, defence, and climate change, countries need to take significant offsetting fiscal policy adjustments to ensure that debt ratios do not rise further (Guillemette and Château 2023). To help address these challenges, countries can draw on the lessons from past episodes of large and sustained reductions in debt-to-GDP (Mitchener et al. 2019).

In a recent paper (Pina et al. 2025), we analyse debt reduction episodes in 33 OECD economies over 1976-2019. Such episodes are defined as ones that persist for a minimum of five years and bring down the gross debt-to-GDP ratio by at least ten percentage points. While in the course of an episode temporary and small ratio reversals may take place, all episodes start immediately after a debt ratio peak and end when the debt ratio bottoms out (Figure 1 shows an example). We identified 34 episodes, with 25 different countries having experienced at least one episode. These are analysed using a standard debt decomposition framework augmented by a detailed disaggregation of spending and taxation. We also studied developments in the run-up to episodes and compared budget items’ dynamics in episodes with the rest of the sample.

Figure 1 A debt reduction episode: Spain, 1997-2007

Note: The run-up is a period of up to five years just before the debt reduction episode. The number of years is chosen to maximise the improvement in the average underlying primary balance (which corrects for the cycle and one-offs) as a share of potential GDP (see arrow). Consolidation years with no sustained debt reduction are those years outside debt reduction episodes and run-ups where the underlying primary balance as a share of potential GDP rises. The remaining observations are baseline years.
Source: OECD Economic Outlook 115 database; and authors’ calculations.

Public debt reduction has relied on growth and fiscal policy action

Economic growth has been the main driver of debt declines over the length of episodes. Average annual GDP growth was 3.7% in episode years, and only 2.3% in the rest of the sample. This brought down debt-to-GDP ratios by making the denominator grow faster, but also by improving primary balances through buoyant tax revenues and smaller outlays on certain social transfers, such as unemployment benefits. Averaging across all debt reduction episodes with available data, better cyclical conditions (growth above trend) have made the primary balance as a share of GDP improve by 1.4 percentage points (the difference between the average cyclical component of the primary balance in each episode and that when the debt ratio peaks).

Discretionary fiscal policy has also played a major role in debt reduction episodes, via both consolidation (Ando et al. 2023) and changes in the composition of expenditure and revenue. Comparing each episode to the year prior to its start, the estimated underlying primary balance (which removes the impacts of the business cycle and budgetary one-offs such as large bank recapitalisation expenditures after a financial crisis) has increased by 0.4% of potential GDP on average. This is only a modest improvement, but in line with the fact that successful debt reduction episodes have seen countries largely avoid fiscal expansion in good times. Such improvements have also often been part of a broader consolidation effort set in motion a few years before the debt ratio starts to decline. Comparing with underlying primary balances over up to five previous years (the run-up to the episode; see arrow in Figure 1), the average improvement rises to 1.8% of potential GDP, fully achieved by restraining expenditure.

Debt reduction episodes have also seen changes in the composition of the public finances. To assess this, we use the expenditure and revenue components of the OECD Public Finance Dataset (Bloch et al. 2016) in underlying terms (removing cyclical effects and budgetary one-offs), and compare averages over debt reduction episodes and over run-ups. Spending on healthcare is the only expenditure item found to have increased on average during debt reduction episodes. Spending on education and families and children, also generally regarded as important for growth and equity (Cournède et al. 2014, Fournier and Johansson 2016), has declined, along with pension spending. Public investment has undergone more sizeable restraint, and subsidies and unemployment benefits have been the items most heavily constrained in proportional terms. On the revenue side, corporate income tax proceeds have tended to strongly increase, with often some decline in revenue from personal income taxes and social security contributions.

Budget components have displayed different dynamics in debt reduction episodes

The compositional changes summarised above point to a need for a closer look at developments in expenditure and revenue items over debt reduction episodes and their run-up years. Do such developments differ from those in other periods, such as consolidation years which failed to deliver sustained debt reduction, or do they mainly reflect a continuation of longstanding trends, such as the rise of spending on pensions and healthcare?

We look at annual changes in the different public finance components (in underlying terms and relative to potential GDP), with full-sample averages shown in Figure 2. The full sample is then divided into three subsamples (see again Figure 1):

1. Debt reduction episodes and run-ups
2. Consolidation years with no sustained debt reduction (referred to as ‘other consolidation years’ below)
3. Baseline years (the remaining observations)

Figure 2 Average annual change of budget components

Underlying budget components in % of potential GDP, average annual change, full sample

Note: The sample covers 32 OECD economies over at most 1976-2019, though data availability is limited for some countries. The use of underlying spending or revenue relative to potential GDP removes the effects of the economic cycle and budgetary one-offs. See Pina et al. (2025) for further information.
Source: OECD Economic Outlook 98 database; OECD Economic Outlook 115 database; AMECO database, European Commission’s Directorate General for Economic and Financial Affairs; and authors’ calculations.

Differences in annual changes in both debt reduction episodes and run-ups, and other consolidation years, relative to the remaining sample are summarised in Figure 3, after controlling for time-invariant country characteristics and time-varying factors common to all countries.   

Figure 3 Annual change of budget components, difference relative to baseline years

Underlying budget components in % of potential GDP, regression coefficients and their significance

Note: Bars show the coefficients on dummy variables for debt reduction episodes and run-ups and for consolidation years with no sustained debt reduction in a regression model for the annual change in each underlying budget component as a share of potential GDP, with country and year fixed effects. Solid bars indicate statistical significance at 95%, and an asterisk (*) next to a component name indicates that the difference between the coefficients depicted in red and blue is statistically significant at 95%. Same sample as in Figure 2. Interm. cons. stands for intermediate consumption. See Pina et al. (2025) for further information.
Source: OECD Economic Outlook 98 database; OECD Economic Outlook 115 database; AMECO database, European Commission’s Directorate General for Economic and Financial Affairs; and authors’ calculations.

For all spending items, annual changes tend to be smaller in both debt reduction episodes and run-ups and in other consolidation years than in baseline years, often significantly so. Expenditure restraint relative to baseline is largest for most items in other consolidation years, though differences with debt reduction years are rarely statistically significant. Investment is an exception, typically the object of much larger cuts in consolidation years not followed by a sustained debt reduction. It is also noteworthy that the strong upward trend in pension outlays has been curbed significantly in debt reduction episodes and run-ups, whereas the downward trend in subsidies has strengthened. This evidence suggests that necessary expenditure restraint may be most effective when calibrated to minimise adverse impacts on growth and accompanied by reforms such as the promotion of longer working lives.

For most revenue items, annual changes during debt reduction episodes and other consolidation years tend to be larger than in baseline years, especially for other consolidation years. Strong rises in personal income tax revenues are particularly a feature of consolidation efforts which fail to durably bring down debt ratios. Annual changes in social security contributions and environmental taxes are also significantly larger in those years than in debt reduction episodes and run-ups. Annual changes in corporate income tax revenues are notably stronger in both debt reduction years and other consolidation years than at other times. Past evidence thus suggests that higher labour taxation may not be an effective means of durably reducing public debt.

Some lessons learned

With governments facing multiple spending pressures and growth more subdued than in many earlier episodes, reductions in the debt-to-GDP ratio may now be harder to achieve than in past decades, and a larger contribution from revenue increases may be required. Nonetheless, governments can draw lessons from past episodes in which countries have achieved large and sustained reductions in their debt ratios and changed the composition of the public finances. Past experience shows that it is possible to make significant savings in spending items such as subsidies and certain transfers, including pensions. However, those savings will often need to be accompanied by better targeting and design of spending programmes to maintain support for those most in need. Evidence also shows that debt declines have often witnessed strong increases in revenues from corporate income taxes, whereas higher proceeds from personal income taxes have mainly taken place in consolidation efforts failing to achieve durable debt reduction. Finally, perhaps the most important insight is that governments do need to take advantage of good times to rebuild fiscal buffers if they are to control debt. 

Source : VOXeu