Public debt and economic growth: Two public debt management scenarios in Montenegro

Maja Baćović ()

BH Ekonomski forum, 2021, vol. 14, issue 1, 89-115

Abstract: Growing public debt is one of the biggest challenges faced by both developing and developed economies. Available research indicates the negative impact of public debt growth on economic growth. Applying the OLS method to the panel data for the countries of the Western Balkans and the period from 1998 to 2019, we found that one percentage growth in public debt leads to a decrease in the GDP growth rate by 0.036 percentage points. In addition, an increase in public debt by one percentage point leads to a decrease in the productivity growth rate by 0.079 percentage points. The results of the research for Montenegro as a case (two scenarios of fiscal policy and the period 2021-2040), showed that, if expenditures remain intact, due to the small difference between the forecasted average GDP growth rate in the period 2021-2040 and interest rates (assumed constant), such a scenario will lead to a slower change in the public debt-to-GDP ratio (23% decrease in two decades). In addition, the cost of interest in public debt in this scenario over the entire period is higher than 2% of GDP. If the fiscal policy is changed toward a reduction in government spending, the short-term GDP growth rate would be slightly reduced, but both the expenditures for interest (less than 2% of GDP) and public debt (decrease of 63% in two decades) would be reduced significantly. Although reduced government spending will have a negative impact on GDP growth in the short run, the country will benefit in the long run as reduced public debt will have a positive impact on GDP and productivity growth.

Keywords: Public debt; Government expenditures; Economic growth (search for similar items in EconPapers)
Date: 2020-12-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://bhef.unze.ba/article/22 Journal Article (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:etl:journl:22

DOI: 10.5937/bhekofor2101089b

Access Statistics for this article

More articles in BH Ekonomski forum from University of Zenica, Faculty of Economics Zenica
Bibliographic data for series maintained by University of Zenica, Faculty of Economics Zenica ().