The impact of public debt on economic growth: determining of factors and their interactions
DOI: https://doi.org/10.3846/jbem.2025.24703Abstract
This article suggests that the expenditure multiplier and the interactions among its key components can help explain whether increasing public debt encourages or inhibits economic growth. As per the theoretical underpinnings of the effect of debt on growth, its influence is observable in regard to private consumption, import and investment. The size of the expenditure multiplier depends on factors like the tax rate and the marginal propensities to consume, import, and invest – each influencing the multiplier differently. Specifically, the effect is positive in relation to marginal propensities to consume and invest and negative in relation to the tax rate and marginal propensity to import. Our findings show that in countries with relatively lower government effectiveness, debt has a greater impact on growth, mainly due to higher tax rates rather than high import levels. Conversely, in countries with higher government effectiveness, the influence of debt on growth remains similar regardless of tax rates, if the propensity to import is low. In cases where the public sector dominates the economy, the impact of debt on economic growth is determined by factors other than the multiplier effect.
Keywords:
economic growth, public debt, tax rate, expenditure multiplier, propensity to import, propensity to spend, propensity to investHow to Cite
Share
License
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Abbas, Q., Junqing, L., Ramzan, M., & Fatima, S. (2021). Role of governance in debt–growth relationship: Evidence from panel data estimations. Sustainability, 13(11), Article 5954. https://doi.org/10.3390/su13115954
Alshammary, M. D., Karim, Z. A., Khalid, N., & Ahmad, R. (2020). Debt-growth nexus in the MENA Region: Evidence from a panel threshold analysis. Economies, 8(4), Article 102. https://doi.org/10.3390/economies8040102
Angyridis, C., & Michelis, L. (2021). Structural breaks, debt limits and the tax smoothing hypothesis: Theory and evidence from the OECD countries. Empirical Economics, 60, 1283–1307. https://doi.org/10.1007/s00181-019-01786-2
Augustine, B., & Rafi, M. (2023). Public debt – economic growth nexus in emerging and developing economies: Exploring nonlinearity. Finance Research Letters, 52, Article 103540. https://doi.org/10.1016/j.frl.2022.103540
Bakari, S., & Mabrouki, M. (2017). Impact of exports and imports on economic growth: New evidence from Panama. Journal of Smart Economic Growth, 2(1), 67–79.
Bakari, S., Fakraoui, N., & Tiba, S. (2019). Domestic investment, export, import and economic growth in Brazil: An application of vector error correction model (MPRA Paper 95528). https://econpapers.repec.org/paper/pramprapa/95528.htm
Baldacci, E., & Kumar, M. S. (2010). Fiscal deficits, public debt, and sovereign bond yields (IMF Working Paper No. WP/10/184). International Monetary Fund. https://doi.org/10.5089/9781455202188.001
Barrell, R., Holland D., & Hurst, I. (2012). Fiscal multipliers and prospects for consolidation. OECD Journal: Economic Studies, 2012(1). https://doi.org/10.1787/eco_studies-2012-5k8x6k5wc58x
Batini, N., Eyraud, L. Forni, L., & Weber, A. (2014). Fiscal multipliers: Size, determinants, and use in macroeconomic projections (IMF Technical Notes and Manuals No. 2014/04). International Monetary Fund. https://doi.org/10.5089/9781498382458.005
Belanová, K., Golha, P., & Sivák, R. (2023). Innovation performance of EU countries in the context of research and development expenditures. Entrepreneurship and Sustainability Issues, 11(1), 268–281. https://doi.org/10.9770/jesi.2023.11.1(16)
Bentour, E. M. (2020). On the public debt and growth threshold: One size does not necessarily fit all. Applied Economics, 53(11), 1280–1299. https://doi.org/10.1080/00036846.2020.1828806
Berben, R.-P., & Brosens, T. (2007). The impact of government debt on private consumption in OECD countries. Economics Letters, 94(2), 220–225. https://doi.org/10.1016/j.econlet.2006.06.033
Bhattacharya, R. (1999). Private sector consumption behavior and non-Keynesian effects of fiscal policy (IMF Working paper Vol. 1999, Issue 112, p. 28). International Monetary Fund. https://doi.org/10.5089/9781451853582.001
Bhattacharya, R., & Mukherjee, S. (2013). Non-Keynesian effects of fiscal policy in OECD economies: An empirical study. Applied Economics, 45(29), 4122–4136. https://doi.org/10.1080/00036846.2012.752571
Blanchard, O. J. (1990). Can severe fiscal contractions be expansionary? Tales of two small European countries: Comment. NBER Macroeconomics Annual, 5, 111–116. https://doi.org/10.1086/654132
Brambor, T., Clark, W., & Golder, M. (2006). Understanding interaction models: Improving empirical analyses. Political Analysis, 14(1), 63–82. https://doi.org/10.1093/pan/mpi014
Butkus, M., Cibulskiene, D., Garsviene, L., & Seputiene, J. (2021a). The heterogeneous public debt–growth relationship: The role of the expenditure multiplier. Sustainability, 13(9), Article 4602. https://doi.org/10.3390/su13094602
Butkus, M., Cibulskiene, D., Garsviene, L., & Seputiene, J. (2021b). Empirical evidence on factors conditioning the turning point of the public debt–growth relationship. Economies, 9(4), Article 191. https://doi.org/10.3390/economies9040191
Checherita, Cr., & Rother, Ph. (2010). The impact of high and growing government debt on economic growth an empirical investigation for the euro area (ECB Working Paper Series, No. 1237). European Central Bank. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1237.pdf
Chiu, Y., & Lee, C. (2017). On the impact of public debt on economic growth: Does country risk matter? Contemporary Economic Policy, 35(4), 751–766. https://doi.org/10.1111/coep.12228
Cho, D., & Rhee, D.-E. (2013). Non-linear effects of government debt on private consumption: Evidence from OECD countries. Economics Letters, 121(3), 504–507. https://doi.org/10.1016/j.econlet.2013.10.013
Christopher, A., & Skaperdas, A. (2024). Government debt, limited foresight, and longer-term interest rates (Finance and Economics Discussion Series 2024-027). Board of Governors of the Federal Reserve System. https://doi.org/10.17016/feds.2024.027
Claeys, P., Moreno, R., & Surinach, J. (2012). Debt, interest rates, and integration of financial markets. Economic Modelling, 29(1), 48–59. https://doi.org/10.1016/j.econmod.2011.05.009
Dafermos, Y. (2018). Debt cycles, instability and fiscal rules: A Godley-Minsky synthesis. Cambridge Journal of Economics, 42(5), 1277–1313. https://doi.org/10.1093/cje/bex046
de Mendonça, H. F., & Brito, Y. (2021). The link between public debt and investment: An empirical assessment from emerging markets. Applied Economics, 53(50), 5864–5876. https://doi.org/10.1080/00036846.2021.1931008
Dime, R., Ginting, E., & Zhuang, J. (2021). Estimating fiscal multipliers in selected Asian economies (ADB Economics Working Paper Series No. 638). Asian Development Bank. https://doi.org/10.22617/WPS210309-2
Elkhalfi, O., Chaabita, R., Benboubker, M., Ghoujdam, M., Zahraoui, K., El Alaoui, H., Laalam, S., Belhaj, I., & Hammouch, H. (2024). The impact of external debt on economic growth: The case of emerging countries. Research in Globalization, 9, Article 100248. https://doi.org/10.1016/j.resglo.2024.100248
Engen, E. M., & Hubbard, R. G. (2004). Federal government debt and interest rates. NBER Macroeconomics Annual, 19, 83–138. https://doi.org/10.1086/ma.19.3585331
Giavazzi, F., & Pagano, M. (1990). Can severe fiscal contractions be expansionary? Tales of two small European countries (NBER Working Paper No. 3372). National Bureau of Economic Research. https://doi.org/10.3386/w3372
Gogas, P., Plakandaras, V., & Papadimitriou, T. (2014). Public debt and private consumption in OECD countries. The Journal of Economic Asymmetries, 11, 1–7. https://doi.org/10.1016/j.jeca.2014.03.001
Gomez-Puig, M., Sosvilla-Rivero, S., & Martinez-Zarzoso, I. (2022). On the heterogeneous link between public debt and economic growth. Journal of International Financial Markets, Institutions and Money, 77, Article 101528. https://doi.org/10.1016/j.intfin.2022.101528
Grondys, K. & Kot, M. (2023). The global supply chains management against future risks a post-pandemic vision during the ongoing war. Journal of Entrepreneurship and Sustainability Issues, 10(4), 10–25. https://doi.org/10.9770/jesi.2023.10.4(1)
Huang, Y., Pagano, M., & Panizza, U. (2020). Local crowding-out in China. The Journal of Finance, 75(6), 2855–2898. https://doi.org/10.1111/jofi.12966
Huang, Y., Panizza, U., & Varghese, R. (2018). Does public debt crowd out corporate investments? International evidence (Working Paper No. HEIDWP08-2018). The Graduate Institute of International Studies. https://www.econstor.eu/handle/10419/201691
Huidrom, R., Kose, M. A., Lim, J. J., & Ohnsorge, F. L. (2020). Why do fiscal multipliers depend on fiscal positions? Journal of Monetary Economics, 114, 109–125. https://doi.org/10.1016/j.jmoneco.2019.03.004
Ilzetzki, E., Mendoza, E. G., & Vegh, C. A. (2013). How big (small?) are fiscal multipliers? Journal of Monetary Economics, 60(2), 239–254. https://doi.org/10.1016/j.jmoneco.2012.10.011
Islam, A. M., & Nguyen, H. (2024). Distributional crowding out effects of public debt on private investment in developing economies (Policy Research Working Paper 10786). World Bank Group. https://doi.org/10.1596/1813-9450-10786
Janeba, E., & Todtenhaupt, M. (2018). Fiscal competition and public debt. Journal of Public Economics, 168, 47–61. https://doi.org/10.1016/j.jpubeco.2018.10.001
Johansson, M., & Jönsson, K. (2003). Public debt and the effects of government expenditure on private consumption – A Kalman filter analysis of the Swedish experience 1970–1997 (Working Papers 2003:3). Lund University, Department of Economics.
Kameda, K. (2014). Budget deficits, government debt, and long-term interest rates in Japan. Journal of the Japanese and International Economies, 32, 105–124. https://doi.org/10.1016/j.jjie.2014.02.001
Kinoshita, N. (2006). Government debt and long-term interest rates (IMF Working Paper No. WP/06/63). International Monetary Fund. https://doi.org/10.5089/9781451863239.001
Krogstrup, S. (2002). Public debt asymmetries: The effect on taxes and spending in the European Union (ECB Working paper No. 162). European Central Bank (ECB). https://doi.org/10.2139/ssrn.358020
Kusairi, S., Maulina, V., & Margaretha, F. (2019). Public debt and private consumption in Asia Pacific countries: Is there evidence for Ricardian equivalence? Journal of International Studies, 12(1), 50–64. https://doi.org/10.14254/2071-8330.2019/12-1/3
Laubach, T. (2009). New evidence on the interest rate effects of budget deficits and debt. Journal of the European Economic Association, 7(4), 858–885. https://doi.org/10.1162/JEEA.2009.7.4.858
Law, S. H., Ng, C. H., & Kutan, A. M., & Law, Zh. K. (2021). Public debt and economic growth in developing countries: Nonlinearity and threshold analysis. Economic Modelling, 98, 26–40. https://doi.org/10.1016/j.econmod.2021.02.004
Liobikienė, G., & Butkus, M. (2021). Determinants of greenhouse gas emissions: A new multiplicative approach analysing the impact of energy efficiency, renewable energy, and sector mix. Journal of Journal of Cleaner Production, 309(1), Article 127233. https://doi.org/10.1016/j.jclepro.2021.127233
Malešević-Perović, L. (2016). Government debt-interest rate nexus in G7 countries over a long horizon. Panoeconomicus, 63(5), 603–625. https://doi.org/10.2298/PAN140724023M
Mironikovaitė, I., Garšvienė, L., Matuzevičiūtė-Balčiūnienė, K., & Ruplienė, D. (2023). Threshold effects of public debt on the tax burden: Evidence from EU member states. Intelectual Economics, 17(2), 292–307.
Mondal, S. P., & Maitra, B. (2022). Deficits, debt and interest rates in Sri Lanka: Does the spillover of foreign interest rates matter? The Journal of Applied Economic Research,16(1), 28–48. https://doi.org/10.1177/09738010211067399
Morina, F., Misiri, V., & Alijaj, Sh. (2024). Examining the relationship between public debt and private consumption in European OECD countries (2011–2020). Quantitative Finance and Economics, 8(1), 75–102. https://doi.org/10.3934/QFE.2024004
Nickel, C., & Tudyka, A. (2014). Fiscal stimulus in times of high debt: Reconsidering multipliers and twin deficits. Journal of Money, Credit and Banking, 46(7), 1313–1344. https://doi.org/10.1111/jmcb.12148
Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: Is there a causal effect? Journal of Macroeconomics, 41, 21–41. https://doi.org/10.1016/j.jmacro.2014.03.009
Perović, L. M. (2018). Public debts, deficits and interest rates in CEECs: Are there spatial spillovers? Post-Communist Economies, 30(5), 675–692.
Puonti, P. (2022). Public debt and economic growth (ETLA Report No. 127). The Research Institute of the Finnish Economy (ETLA). https://hdl.handle.net/10419/270485
Salmon, J., & de Rugy, V. (2020). Debt and growth: A decade of studies. SSRN. https://doi.org/10.2139/ssrn.3690510
Sutherland, A. (1997). Fiscal crises and aggregate demand: Can high public debt reverse the effects of fiscal policy? Journal of Public Economics, 65, 147–162. https://doi.org/10.1016/S0047-2727(97)00027-3
Teliti, D., & Kotorri, A. (2017). The impact of public debt on GDP growth – the debt multiplier in the case of Albania. International Journal of Innovation and Economic Development, 3(4), 60–67. https://doi.org/10.18775/ijied.1849-7551-7020.2015.34.2006
Turner, D., & Spinelli, F. (2013). The effect of government debt, external debt and their interaction on OECD interest rates (Working Paper No. 1103). OECD. https://doi.org/10.1787/5k3ttg5c0026-en
Víghová, A. (2023). Discovery of tax evasion in the field of consumption taxes. Entrepreneurship and Sustainability Issues, 11(1), 209–219. https://doi.org/10.9770/jesi.2023.11.1(12)
View article in other formats
CrossMark check
Published
Issue
Section
Copyright
Copyright (c) 2025 The Author(s). Published by Vilnius Gediminas Technical University.
License
This work is licensed under a Creative Commons Attribution 4.0 International License.