WP 2025-10.
Executive Summary
Many countries’ Founding Fathers and large portions of academia believed that constitutions, common-sense economics, and people’s vigilance would be enough to restrain taxation and public debt. It was wishful thinking. In developed countries, taxation started growing to finance the Great War and kept rising even during relatively peaceful periods. Public debt as a ratio of GDP was also moderate until the early 20th century, rose until the end of the Second World War, fell back to about 25%, but eventually rose steadily as from the mid-1970s. It is now about 100%.
Some public debt is visible, but a large share of it was opaque and has sometimes been known as “shadow debt”. This expression refers to commitments to future public expenditure, to be financed through future taxation or future sales of government bonds. The main examples are pay-as-you-go, unfunded pension schemes, whereby the policymaker accepts liabilities (obligations to pay future pensions) but has no assets to back them with. Their shadowy nature is the fact that those liabilities are real and can be quantified, they do not appear in the books.
