Evaluating government debt thresholds and fiscal consolidation: insights from Organisation for Economic Co-operation and Development countries

Eugene Msizi Buthelezi

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: Previous research has established various debt thresholds beyond which economic performance deteriorates, but few studies examine these thresholds in the context of ongoing fiscal consolidation efforts. This study investigates the interplay between government debt and fiscal consolidation in Organisation for Economic Co-operation and Development countries from 2000 to 2022. The findings reveal that fiscal consolidation, encompassing reductions in government expenditure and tax increases, results in a notable reduction of 1.366% in the primary fiscal balance and a minor 0.024% decrease in GDP per capita. This study significantly contributes to the literature by clarifying the impact of fiscal consolidation relative to specific debt thresholds and its implications for economic performance. A critical government debt threshold of 31.4% of GDP is identified, beyond which debt negatively affects GDP per capita in the presence of fiscal consolidation. Similarly, a debt threshold of 86.7% is found to have a detrimental effect on the primary fiscal balance in the presence of fiscal consolidation. The study shows for disaggregating government expenditure and taxation, that military spending reduces GDP per capita, while investments in health and education have positive effects. Notably, government consumption expenditure harms GDP per capita. On the fiscal balance side, military and education spending improve fiscal health, whereas government consumption and indirect taxes contribute negatively. The findings underline the importance of targeted fiscal policies, suggesting that prudent government spending, especially in health as well as education, and careful management of debt levels are crucial for maintaining economic stability during fiscal consolidation.

Date: 2025
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