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We analyze effects of public debt in a basic endogenous growth model with productive public spending. We demonstrate that a discretionary policy in general violates the inter-temporal government budget constraint along a balanced growth path. A balanced government budget gives a unique saddle point stable growth path. With a rule based policy, two saddle point stable balanced growth paths can occur, depending on the inter-temporal elasticity of substitution of consumption and on the primary surplus policy. Hence, an underdevelopment trap exists and the initial debt to GDP ratio is decisive whether the economy converges to a balanced growth path with a high or a low growth rate in the long-run. Further, higher debt goes along with smaller long-run growth and we derive a condition such that a deficit financed increase in public spending raises the growth rate.
