Impacting business confidence: the role of public debt expectation updates in OECD economies

Helder Ferreira de Mendonça and João Dantas

Journal of Economic Studies, 2026, 1-20

Abstract: PurposeThe paper aims to assess how changes in expectations regarding future public debt affect business confidence. It shifts the focus from current debt levels to forward-looking fiscal signals, evaluating whether revisions in projected public debt across short- and medium-term horizons shape firms' expectations about future economic conditions and investment prospects.Design/methodology/approachThe study employs panel data analysis for 24 Organisation for Economic Co-operation and Development (OECD) countries over the period 2011–2023. Public debt expectation updates are constructed using OECD Economic Outlook projections, considering both “vintage” and “revised” releases. The empirical strategy estimates pooled OLS and fixed-effects models, alongside jackknife procedures to address small-sample bias. The analysis incorporates macroeconomic expectations (output gap, inflation and exchange rate) and examines multiple dimensions of fiscal expectation dynamics: level updates, changes in updates, persistence and directional shifts (upgrades and downgrades).FindingsThe results consistently indicate that increases in expected public debt reduce business confidence. Changes in the speed of debt expectation updates and persistent upward revisions intensify this negative effect. Conversely, improvements in projected debt paths increase business confidence. Evidence of asymmetry suggests that negative fiscal signals have stronger and more robust effects than positive ones. The results remain stable across specifications and robustness checks.Research limitations/implicationsThe analysis is limited to OECD countries and relies on publicly available projection data, which may not capture all dimensions of fiscal expectations. The relatively short time span and country-level aggregation may mask sectoral heterogeneity in the response of business confidence to fiscal expectation updates. Future research could explore micro-level data, longer horizons and interactions with monetary policy expectations.Practical implicationsPolicymakers should recognize that revisions in fiscal expectations affect business sentiment. Transparent and credible fiscal frameworks that signal debt sustainability can help sustain business confidence and investment. Managing expectations, rather than only fiscal outcomes, is therefore relevant for stabilizing economic activity.Social implicationsBy influencing business confidence, fiscal expectations may indirectly affect investment, employment and economic growth. Sound fiscal communication and credible debt management can contribute to macroeconomic stability, benefiting broader society through improved economic conditions and reduced uncertainty.Originality/valueThe paper contributes by focusing on updates in public debt expectations rather than static debt levels. It introduces multiple indicators of fiscal expectation dynamics, including changes in updates, persistence and directional shifts in projections. This forward-looking approach provides new evidence on the role of fiscal expectations in shaping business confidence.

Keywords: Business confidence; Public debt; Macroeconomic expectations; OECD economies (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-04-2026-0368

DOI: 10.1108/JES-04-2026-0368

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