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Public Capital Expenditure and Debt Dynamics: Evidence from the European Union

Antra Bhatt, Alessandro Piergallini () and Pasquale Scaramozzino

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the relationship between public capital expenditure and public debt in the European Union (EU) on a panel of fifteen countries over the sample period 1980-2013. We find robust evidence of a negative cointegrating relation, according to which increases in the capital expenditure-GDP ratio cause reductions in the debt-GDP ratio in the long run. Our empirical results suggest that current EU fiscal austerity can trigger upward debt spirals if cuts in total expenditure disregard its composition. Consistently with the “golden rule of public finance”, EU fiscal rules should allow for higher levels of capital expenditure in order to foster debt consolidation through growth dividends.

Keywords: Fiscal sustainability; EU; panel cointegration; public expenditure; public debt. (search for similar items in EconPapers)
JEL-codes: C23 E62 H62 H63 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-eec, nep-fdg, nep-mac and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:62827

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