| Sumario: | Economic growth in advanced economies has slowed since the early 2000s, while government debt has risen. This article sheds light on this high-debt, low-growth environment by highlighting innovation as a mechanism. It argues that high government debt leads firms to cut back on R&D investment, potentially by amplifying policy uncertainty and financing frictions. Based on data from manufacturing industries since 1980, the results show that high government debt predicts a disproportionate and persistent growth slowdown in industries that rely more on R&D. This pattern is consistent with R&D investment falling in those industries when debt is high. Importantly, this effect is weaker in countries with deeper or more open financial systems, suggesting that better access to finance helps protect innovation when debt is high. These findings imply that safeguarding innovation is crucial to sustain growth in the current high-debt environment.
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