Determinants of Government Debt in the Member States of the European Union: Sources of Fiscal Risk

Abstract

In times when the national economy needs increased financial support from governments, the fiscal space they have and the determinants of public debt come to the fore. Sudden increases in public spending or significant decreases in public revenue represent fiscal risks, and the level of sovereign debt is a measure to quantify fiscal risk. At international level, banking crises, government guarantees, publicprivate partnerships, companies with majority state capital, and non-performing loans are revealed by history as the main sources of financial crises and fiscal risk. This study aims to identify whether social assistance expenditures, government guarantees, public-private partnerships, non-performing loans, or tax revenues influence the evolution of the government debt of the Member States of the European Union. The data used were taken from Eurostat and were organised as panel data, the analysed period is 2010-2018. To estimate the regressions, we used the Eviews software, and the results obtained revealed that social assistance is the variable that most strongly influences, in the same sense, the public debt. This points to the fact that changes in pension and social assistance spending, for example, topics with greater social impact, are capable of further indebtedness and have long-term effects on government spending on interest.

Analyzing the Importance of the Determinants of Public Debt and Its Policy Implications: A Survey of Literature

“…On the other hand, Ricardo formulated what is known as the Ricardian equivalence theory, which was further developed by Barro (Barro 1979). This theory postulates that when a government increases expenditures that are financed with debt stimulate demand, demand is unchanged (Ricciuti 2003; Meissner and Rostam-Afschar 2017; Sardoni 2021). However, the resulting increase in public debt places higher fiscal pressure on the government, leading to eventual tax increases to repay the accumulated interest.…”