Assume the current public debt to GDP ratio is 100 per cent and that the nominal interest rate and the inflation rate remain constant and zero. Under these circumstances it is impossible to reduce a public debt to GDP ratio, using an austerity package if the rise in the primary surplus to GDP ratio is always exactly offset by negative GDP growth rate of the same percentage value.
Answer: True
The answer is True.
This question plays on the first but investigates a difference aspect of the framework outlined above.
The following Table adds another year to the analysis presented above. You can see that there is a recession being encountered with negative GDP growth of 2 per cent (this is also a decline in real GDP because the inflation rate is zero).
Now the government responds to the deficit terrorists and tries to reduce the public debt ratio by running a primary budget surplus of 2 per cent of GDP - it is a negative sign in the table because the construction is (G - T)/GDP which means a surplus is a negative number.
From the formula, the change in the public debt ratio is zero.
As long as the primary surplus as a per cent of GDP is exactly equal to the negative GDP growth rate, there can be no reduction in the public debt ratio.
Of-course, this strategy, which is being pushed onto governments by the conservatives now will likely have to consequences.
First, it will probably push the GDP growth rate further into negative territory which, other things equal, pushes the public debt ratio up.
Second, as GDP growth declines further, the automatic stabilisers will push the balance result towards (and into after a time) deficit, which, given the borrowing rules that governments voluntarily enforce on themselves, also pushed the public debt ratio up.
So austerity packages, quite apart from their highly destructive impacts on real standards of living and social standards, typically fail to reduce public debt ratios and usually increase them.
So even if you were a conservative and erroneously believed that high public debt ratios were the devil's work, it would be foolish (counter-productive) to impose fiscal austerity on a nation as a way of addressing your paranoia. Better to grit your teeth and advocate higher deficits and higher real GDP growth.
That strategy would also be the only one advocated by MMT.
The following blog may be of further interest to you: