Formulate and Explain (in general) How Debt Dynamics are Set in Motion: Economics Assignment, UCD,

Assignment objective:

Using the country assigned to you (sent by email), you are required to:

1) Formulate and explain (in general) how debt dynamics are set in motion and how a government would stabilize its debt/GDP ratio at a specific level;

2) Examine the key government finance statistics (general government balance and general government debt) for your country compared to the EA19 from 2005 to 2018 (i.e. illustrate and discuss trends);

3) Examine whether the global financial crisis and subsequent Eurozone crisis caused a debt dynamic in your country and the EA19, and the difficulties (if any) in achieving debt sustainability (illustrate trends in debt/GDP ratio and 10yr sovereign bond yields) and;

4) Starting in 2018 you should create your own forecast for the debt trajectory to 2023 of both your country and EA19. If your assigned country is running a deficit in 2018, assume fiscal consolidation of 0.5% of GDP per year until your country’s budget is balanced (and then assume it remains balanced thereafter) from 2018-2023. You should run this forecast under the following four scenarios for economic growth:

1) Negative real growth and deflation (-2%);

2) Zero real growth and zero inflation (0%);

3) Low real growth and inflation (2%); and

4) High real growth and inflation (5%).

To construct your forecast you should start with the following figures for 2018 for your country and the EA19:

1) GDP (in current market prices) in millions of Euros,

2) Government consolidated gross debt in millions of Euros, and

3) General government balance in millions of Euros.

You should compare the various debt trajectories that you calculate with the official forecast for debt dynamics for your country (2019 Assessment) and comment on the assumptions underlying official forecasts (e.g. possibly overly-optimistic assumptions related to future economic growth, inflation, fiscal consolidation, etc.).

You should also review the Commission assessments of the stability programs for your country from 2017 and 2018 and comment on the degree to which they accurately forecasted the debt/GDP ratio for 2018. Lastly, you should comment on the difficulties countries within the Eurozone (that are subject to the rules of the Stability & Growth Pact) potentially face in stabilizing debt dynamics.