The Effect of Government Debt and Other Determinants on Economic Growth: The Greek Experience

Abstract

This study empirically investigates the relationship between economic growth and several factors (investment, private and government consumption, trade openness, population growth and government debt) in Greece, where imbalances persist several years after the financial crisis. The results reveal a long-run relationship between variables. Investment as private and government consumption and trade openness affect positively growth. On the other hand, there is a negative long-run effect of government debt and population growth on growth. Furthermore, the study addresses the issue of break effects between government debt and economic growth. The results indicate that the relationship between debt and growth depends on the debt breaks. Specifically, at debt levels before 2000, increases in the government debt-to-GDP ratio are associated with insignificant effects on economic growth. However, as government debt rises after 2000, the effect on economic growth diminishes rapidly and the growth impacts become negative. The challenge for policy makers in Greece is to halt the rising of government debt by keeping a sustainable growth path. Fiscal discipline should be combined with the implementation of coherent, consistent and sequential growth-enhancing structural reforms.

The Link Between Government Expenditure and Debt as Potential Drivers of Economic Growth in South Africa

“…A one percent increase in government debt will result in a 1.68 average decline in economic growth. These findings are in line with the findings of Pegkas (2018), who found similar results showing that there is a negative relationship between economic growth and public debt in the long run. This negative relationship is attributed to the fact that South Africa is characterised by a high levels of corruption, unemployment, inequality and poverty.…”

The Determinants of Economic Development of Greece

“…As soon as Greece had become a member of the EU, the share of government consumption and transfers and subsidies increased substantially (Pegkas, 2018). My calculations indicate that in 1985, by the end of the first five years of the EU membership, the government transfers and subsidies increased by 310%.…”

Debt and Deficit Growth Rate Reporting for Post-Communist European Union Member States

“…As such, most studies indicate the influence of GGD on economic growth (i.e., related to investments) as negative (Deshpande 1997;Pattollo et al 2011;Clements et al 2003;Shah et al 2017;Smyth and Hsing 1995;Lin and Sosin 2001;Brzozowski et al 2006). Cross-sectional analysis comparing developed and developing countries indicates GGD as a negative factor on economic growth (N'Zue 2018; Brzozowski et al 2006;Pegkas 2018). Positive indicators include political stability, rule of law, and a high-quality, functional public sector.…”

“…When a central bank (i.e., monetary authority) decides on this type of policy, it is usually based on short-term interest to immediately decrease purchasing power parity within the dominant part of society and limit entrepreneurial activity. Central banks operate independently from State government and are responsible for monetary policy, which has a direct effect on the inflation rate (Pegkas 2018). During periods of inflation, a negative outcome will affect everyone except the State, which experiences a taxflation effect (i.e., when inflation decreases GGD and GD from higher inflows of taxation).…”