A numerical evaluation of the sustainable size of the primary deficit in Japan

• We investigate how large a primary deficit-to-GDP ratio can be sustained in Japan.
• Primary deficits cannot be sustained unless a growth rate is unrealistically high.
• Japan’s government needs to achieve a positive primary balance.

We investigate how large a primary deficit-to-GDP ratio Japan’s government can sustain. For this investigation, we construct an overlapping generations model in which multi-generational households live and the government maintains a constant ratio of the primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long run in order to avoid the divergence of the public debt-to-GDP ratio.