Public Debt and Social Expenditure: Friends or Foes?

Eduardo Lora and Mauricio Olivera

No 3298, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper assesses the effects of total public debt (external and domestic) on social expenditure worldwide and in Latin America using an unbalanced panel of around 50 countries for the period 1985-2003. The most robust and important finding is that higher debt ratios do reduce social expenditures, as popular opinion holds. Debt displaces social expenditures not so much because it raises the debt burden, but because it reduces the room (or the appetite) for further indebtedness. Loans from multilateral organizations like the World Bank or the Inter-American Development Bank do not seem to ameliorate the adverse consequences of debt on social expenditures. In accordance with popular wisdom, our results indicate that defaulting on debt obligations does help to increase social expenditures. The main policy implication is that there is no better way to protect social expenditures than to avoid over-indebtedness, especially in Latin America.

Keywords: public debt; social expenditure; debt burden; interest payments; international financial institutions; external debt; default (search for similar items in EconPapers)
Date: 2006-05
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Public debt and social expenditure: Friends or foes? (2007)
Working Paper: Public Debt and Social Expenditure: Friends or Foes? (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:3298

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