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Research on fiscal policy and public debt has been increasing due to indebtedness of many
countries at national level. A lot of countries including both developed and developing have run
into massive debt. Any country may run into debt especially in time of natural disasters, wars
and sudden economic crises. However, the majority of nations borrow money to perform their role
of the state or government. Continuous borrowing accumulates into an unsustainable amount of
debt. Therefore, discussion on optimal level of public debt needs to be broadened. Secondly,
borrowing may pave the ways to an expanded public sector. This study, examines the relationship
between public debt and economic growth, and analyzes optimal level of public borrowing and
influence of national borrowing on the size of the public sector. These objectives are achieved by
developing models, analyzing the relationships of national debt in developed and developing
countries with their per capita income and size of the public sector. Both econometric and
qualitative analyses were conducted in the light of secondary data. The study finds that high
levels of debt offers a target of high growth to developed countries and contributes to expand the
public sector in both developed and developing countries. Debt threshold for developed
economies depends on payability of loans of those countries. Among developing countries, Sri
Lanka is one who is going forward with a significant growth by decreasing its national debt levels
and so controlling the expansion of the public sector.
