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The Effect of Sovereign Debt on Economic Growth and Economic Development

Author

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  • Szabó, Zsolt

Abstract

Researches focusing on the effects caused by growing sovereign debt of developed countries on economic growth gained new momentum in the past few years. One half of the empirical studies concludes that the rising debt slows down the pace of economic growth, while the other half of the analyses says this rule works only above a fix rate of the proportion of debt to GDP. Our linear regression study based on the most recent data of EU-27 countries reveals that a one percentage point increase in the debt to GDP rate causes a slowdown of 0.027 percentage point in the rate of the economic growth, while in new member states joining the EU in 2004 or later the degree of such an effect is higher (0.041 pp). However, with respect to long-term effects of public debt on economic development we realise that in the years preceding the economic crisis the ’optimal’ rate of sovereign debt to GDP was 68 per cent, which has risen to 86 per cent by 2012. According to our calculations the cut in the GDP-proportionate rate of the expenditures on education sets back economic growth.

Suggested Citation

  • Szabó, Zsolt, 2013. "The Effect of Sovereign Debt on Economic Growth and Economic Development," Public Finance Quarterly, Corvinus University of Budapest, vol. 58(3), pages 251-270.
    • Handle: RePEc:pfq:journl:v:58:y:2013:i:3:p:251-270
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    File URL: https://unipub.lib.uni-corvinus.hu/8946/
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    Cited by:

    1. Haytham Y.M. Ewaida, 2017. "The Impact of Sovereign Debt on Growth: An Empirical Study on GIIPS versus JUUSD Countries," European Research Studies Journal, European Research Studies Journal, vol. 0(2A), pages 607-633.

    More about this item

    Keywords

    sovereign debt; economic growth; economic development; education; EU-27;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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