Although a decade has passed since the global financial and economic crisis of 2008, the expansionary fiscal policy in Macedonia can still be felt, primarily through an increased level of public expenditures aimed at stimulation of the economic growth. From 2008 onwards, the Republic of Macedonia has continuously recorded a negative budget balance, which affects the resources allocation and the overall economic situation. The question that arises is whether such interference by the Government in the functioning of the market economy is necessary, especially having in mind the EU regulation in this area. Using a multiple regression model for the period 1996-2015, this paper examines the impact of the budget deficit on Gross Domestic Product (GDP) per capita in Macedonia. Results show that the budget deficit is not a statistically significant determinant of GDP per capita, supporting thus the Ricardian equivalence theory. The analysis is conducted on the basis of statistical data from the World Bank’s database, as well as data from the National Bank of the Republic of Macedonia. Household final consumption expenditure, the unemployment rate and the official exchange rate of the Macedonian Denar against the U.S. Dollar are also taken into consideration as controlling variables. GDP per capita and household final consumption expenditures are in current prices, with natural logarithms applied, whereas the other variables are in nominal terms. The purpose of this paper is to provide an insight into the empirical relationship between the two main variables of interest and to initiate further discussion and analysis.

Due to the crucial role of credit in the economic activity of a country, there is a growing empirical literature examining the determinants of domestic credit to the private sector, which may be demand-side or supply-side factors. It is commonly held that excessive domestic debt reduces private sector credit, raise bank lending rates, and shrink output as the Government competes with the private sector for private savings. For this reason, the aim of this paper is to determine whether persistent budget deficit in the Republic of North Macedonia negatively affects the private sector's access to bank credit, and hence slowing down the economic activity. The analysis considers both, short-run and long-run relationship between domestic credit to private sector provided by banks and budget balance in North Macedonia, as endogenous variables, but also it takes into account the influence of several other exogenous factors.The methodological approach is consisted of visual inspection of the data, correlation analysis, co-integration and causality tests, as well as estimation of the impulse response function and variance decomposition. Based on the estimated VECM model, the results show statistically significant long-run relationship between the endogenous variables, and no short-run causality in any direction.

Government consumption plays an important role for stability of the national economy, especially in periods of economic crisis. However, rapidly growing public debt is a concerning issue nowadays, since it might jeopardize economic growth perspectives. Economic theory suggests that public debt has non-linear impact on economic growth in a form of inverted U-shape. In other words, it is believed that after a certain threshold, public debt will have negative impact on economic growth. Given that such threshold varies significantly across countries, the aim of this paper is to calculate the turning point of the public debt impact in the Republic of North Macedonia. For this purpose, we use non-linear multiple regression model for real GDP growth rate as dependent variable, general government public debt-to-GDP ratio (in nominal and squared terms) as key independent variable, as well as several other controlling variables. Since theory also suggests reverse causality between economic growth and public debt, we use three different estimation techniques (Ordinary Least Squares, Two-Stages Least Squares, and Generalized Method of Moments) to deal with potential endogeneity, as well as to cross-validate the results. Our results show that general government debt in the Republic of North Macedonia positively affects economic growth until it reaches around 30% of GDP, whereas further indebtedness after that turning point will most likely have negative impact. Given that current debt level is slightly above 40% (10 percentage points higher than the turning point), whereby due to the COVID-19 crisis it is expected to grow even more in the upcoming years, the need of urgent fiscal consolidation inevitably arises. In this regards, deeper and more comprehensive analysis is needed in order to identify adequate channels for its efficient and effective implementation.

Research question: Is there a non-linear relationship between public debt and economic growth in North Macedonia, in the form of an inverted U-shape? Motivation: Government consumption plays an important role in the stability of the national economy, especially in periods of economic crisis. However, a rapidly growing public debt is a concerning issue nowadays, since it might jeopardize economic growth perspectives. Economic theory suggests that public debt has non-linear impact on economic growth in the form of an inverted U-shape. In other words, it is believed that after a certain threshold, the public debt will have deleterious impact on economic growth. Idea: Given that such threshold varies significantly across countries, the aim of this paper is to calculate the turning point of the public debt impact in the Republic of North Macedonia. Tools: For this purpose, we use non-linear multiple regression model for the real GDP growth rate as a dependent variable, general government public debt-to-GDP ratio (in nominal and squared terms) as a key independent variable, as well as several other controlling variables. Since theory also suggests reverse causality between economic growth and public debt, we use two different estimation techniques (Ordinary Least Squares and Generalized Method of Moments) to deal with potential endogeneity, and to cross-validate the results. Data: In this regard, we use annual data for the period 1998 – 2019, for 14 variables in total, obtained from several different data sources. Findings: Our results show that general government debt in the Republic of North Macedonia positively affects economic growth until it reaches around 30% of GDP, whereas further indebtedness after that turning point will most likely have a negative impact. Contribution: Given that current debt level is far above the estimated turning point, the need of urgent fiscal consolidation inevitably arises. This is especially important in the light of the ongoing COVID-19 crisis, which imposed the need for strong government intervention and pointed out the importance of the fiscal space for such matter.