Abstract
Government debt development is a timeless issue in economics that has gained even more attention in light of the global financial crisis and the Covid 19 pandemic crisis. The following paper uses several specifications of a logistic probability model to examine the key determinants underlying substantial public debt reductions in Central and Eastern European EU Member States for the period 1996–2020. The results suggest that fiscal adjustments are more likely to be successful in reducing public debt if they are based on expenditure cuts rather than revenue increases. In this context, cuts in social benefits and government employee compensation prove to be particularly effective. In addition, favourable economic growth rates increase the probability of a substantial reduction in government debt.
Highlights
The global financial crisis of 2007/08 has led to unprecedentedly high levels of public debt in many countries around the world
The results suggest that primary expenditure cuts based on reductions in employee compensation and social benefits have a significant impact on the likelihood of substantial public debt reductions
This paper aims to identify the main determinants underlying past substantial public debt reductions, using data from eleven CEECs in the period 1996–2020
Summary
The global financial crisis of 2007/08 has led to unprecedentedly high levels of public debt in many countries around the world. In this context, recent developments related to the outbreak of the Covid-19 pandemic will pose additional challenges due to substantial government support to firms and households as well as extreme losses in output (IMF 2020). The eleven Central and Eastern European EU member states (CEECs) are on average much less indebted than more advanced EU members, the increased public debt still poses considerable risks for these countries. The average gross general government debt-to-GDP ratio in these countries has increased from 26 percent in 2007 to 54 percent in 2020. Six of the CEECs still need to fulfil the Maastricht criteria, which contain thresholds for the government deficit and debt level, in order to join the euro area
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